Optimal Glide Path Selection for Low-Volatility Assets

Abstract

Target-date funds (TDFs) have become a popular choice for retirement plans, and the concept of a glide path is essential for TDFs. One of the key assumption behind glide paths is that the main component of a retirement plan should be growth assets invested in the overall equity market—for example, the S&P 500 Index. Researchers have recently challenged this assumption and argued for using smart beta factors for retirement purposes. Among them, the factor of low volatility may be uniquely suitable for retirement investing. This article studies the use of low-volatility assets for the purpose of retirement planning and the choice of ideal glide paths. This study is agnostic about the means by which the low-volatility risk/return profile is achieved and analyzes four series with diminished volatility constructed with different methodologies. The article concludes that low-volatility assets may indeed help retirement investors achieve their objectives, though such investors must choose ideal glide paths carefully to suit the selected low-volatility series. When equipped with proper low-volatility assets and carefully chosen glide paths, retirement plan managers may both improve the odds that their plans succeed and increase the expected final wealth levels. TOPICS: Mutual fund performance, retirement, other real assets, wealth management Key Findings • Both historical and de novo Monte-Carlo simulations confirm that low-volatility assets can increase the certainty of achieving investing objectives for retirement plans. • The three tested glidepath choices, hockey stick, curved, and straight line, have similar investment outcomes. • Investors with low-volatility assets may use more aggressive glidepaths to not only reduce failure rates but also increase expected final wealth levels.