Investments & Wealth Institute
For many investors, portfolio design seems straightforward: Simply choose the options with the highest potential returns. But for advisors serving clients with a wide range of risk tolerances, that mindset can quickly fall apart. For those who can’t stomach sharp market swings, the “best” strategy on paper isn’t always the right one in practice.
That was the case that Zachary Rayfield, head of goals-based investing research in Vanguard’s Investment Strategy Group, made during a session on glide paths at this year’s Investments & Wealth Institute Strategy Forum in New York.
“From a pure performance standpoint, you’re going to do better with just equities,” Rayfield said. “But it’s about sort of balancing the behavioral aspect, which exists in all investors.”
At the core of that argument is what researchers like Rayfield call human capital theory.
The theory suggests that an individual’s lifetime earning potential — essentially, the future income they expect from their labor — functions as a “bond-like asset,” Rayfield said. Younger workers typically have a high level of human capital because they have decades of earning ahead of them, allowing them to tolerate more investment risk. As people age and their remaining earning years shrink, that human capital declines, effectively making their overall “portfolio” more fragile.
“The idea is that whatever financial capital you have should be mostly invested in equities, because your human capital is bond-like and you want to balance that out by having equity or riskier assets in your financial capital,” Rayfield said. “And obviously, you move later in your career. By that point, most of your wealth is in financial capital. None of it’s human capital when you retire. At that point … you should have more bond-like assets, because you’re trying to keep these things in balance throughout your life cycle. … This is a motivating idea behind why the glide path paradigm makes sense.”
Compared to other approaches that may technically perform better, glide paths also align with the natural shifts in risk tolerance that investors experience as they age, Rayfield said.
The many ways to design a glide path
Glide paths may sound like a single, uniform concept, but in practice, they come in many different shapes.
Some target-date series offer multiple variants — conservative, moderate or aggressive tracks — allowing advisors to choose a trajectory that matches their client’s comfort with volatility. Others layer in decisions about active versus passive management, giving advisors even more levers to adjust.
Beyond these off-the-shelf options, firms are increasingly developing goal-based glide paths that treat retirement income, health care costs and legacy planning as distinct objectives, each with its own risk profile and asset mix.
Advised or dynamic glide paths add another level of nuance. These models adjust in real time based on factors like a client’s savings rate, income growth, risk tolerance or funded status, effectively personalizing the glide path as circumstances change.
Some advisors even use a two-stage approach: Maintain an aggressive allocation until a client reaches a defined funding threshold, then de-risk sharply to protect the progress made.
Recent innovations in glide path design push the boundaries even further. Hybrid annuity target-date funds, for example, combine the stability of a guaranteed income component with the familiar growth-oriented glide path structure, offering investors both downside protection and long-term accumulation potential.
“The idea is that as somebody moves through the life cycle, they allocate some of their money into what we call an income funding strategy,” Rayfield said. “Sometimes this may be an allocation of a stable value fund, or it may be something else. But the idea is that you accumulate to this income strategy and, at some point, you convert that to an annuity purchase, and so you annuitize a portion of your wealth, not the whole thing. This provides you some additional longevity protection in the context of the overall glide path design framework.”
At the same time, a growing number of firms are exploring the strategic inclusion of alternative investments within glide paths. When used thoughtfully, proponents say these assets can enhance diversification and potentially boost returns, providing an additional layer of customization for clients seeking exposure beyond traditional stocks and bonds.
When glide paths get in the way
For all the benefits that glide paths offer, they’re not without their critics.
One common critique of traditional downward-sloping glide paths is their vulnerability to sequence of returns risk. As investors approach retirement — the so-called “red zone” — these glide paths gradually shift portfolios into more conservative allocations.
While this reduces volatility, it also limits the portfolio’s ability to recover from market losses during a critical period. In other words, by steadily de-risking, investors are essentially locked into a path that may constrain growth just when flexibility and upside potential could be most valuable. Rayfield said this is a valid concern, particularly for clients who could tolerate more risk in the years immediately before and after retirement, but that point works both ways.
“There’s the other side of that, which is like, if you keep people in a more risky allocation into the retirement years, then you’re potentially doing even more harm to that person. … They should be in a situation where their goal is not going to be crushed by a certain market event, but if you keep them in an allocation that’s too risky into retirement, there could be more potential for that,” Rayfield said.
Glide paths are also criticized for being a one-size-fits-all approach to portfolio construction. However, Rayfield said that response is often more of a comment on target-date funds — an increasingly popular investment vehicle that follows a glide path design — than a criticism of fundamental design.
“A lot of people tend to think of the glide path … where it’s just like a 100% [allocation] and you just go straight down to 50%,” Rayfield said. “But, you know, there’s a lot of variation for what a glide path design can look like.”
