Delayed-Onset Investment Glide Paths In College Savings And Retirement Plans

When was the last time you checked your investments? Perhaps you’ve thought about decreasing the percentage invested in stocks, based on your age—this is sometimes referred to as portfolio rebalancing.

By delaying the decrease in the percentage invested in stocks in an age-based asset allocation, enrollment date, and target date funds, you may be able to increase your investment returns without significantly increasing the risk of investment loss. But before jumping into this investment strategy, it’s important to understand that any kind of investments come with risk.

Table of Contents Investment Risk Is UnavoidableWhat Is An Asset Allocation?What Is A Dynamic Investment Strategy?What Is A Delayed-Onset Investment Glide Path?Dynamic Asset Allocation for College Savings PlansDynamic Asset Allocation: 2 Scenarios, As It Relates to Your Retirement Plans

Investment Risk Is Unavoidable

The risk of a stock market downturn is unavoidable when you are saving long-term for a child’s college education or for your own retirement. During any 17-year period, the stock market suffers at least three corrections and at least one bear market. A correction is a decline of 10% or more. A bear market is a decline of 20% or more.

During any 45-year period, the stock market suffers at least 10 corrections and at least four bear markets. 

You can manage investment risk by using a dynamic investment strategy that adjusts the asset allocation over time.

What Is An Asset Allocation?

An asset allocation balances investment risk and return by specifying a mix of investment classes which offer different risk and return profiles. The asset allocation specifies particular percentages of aggressive and conservative investments.

  • Aggressive investments include high-risk, high-return investments like stocks and venture capital.

  • Conservative investments include low-risk, low-return investments like bonds, CDs, money market funds and cash.

  • As some investments appreciate in value, it may be necessary to rebalance the portfolio periodically to maintain the target asset allocation. Rebalancing involves selling some investment classes and buying others.

    Most of an investment portfolio’s long-term return on investment is attributable to the asset allocation, as opposed to the specific investments.

    What Is A Dynamic Investment Strategy?

    A dynamic investment strategy changes the asset allocation periodically. One type of dynamic investment strategy shifts from an aggressive mix of investments to a more conservative mix of investments.

    This is in contrast with a static investment strategy, which does not change the asset allocation.

    The pattern of changes in the asset allocation over time is called an investment glide path.

    Both dynamic and state investment strategies rebalance the portfolio periodically. A dynamic investment strategy may rebalance the portfolio more frequently, to match changes in the asset allocation.

    Investors can use a more aggressive asset allocation in the beginning of a dynamic investment strategy because less money has been saved and there is more time to recover from investment losses.

    As the goal approaches, the portfolio is shifted to a more conservative mix of investments, to lock in the gains and reduce the risk of investment losses.

    What Is A Delayed-Onset Investment Glide Path?

    Investment glide paths move off of a high percentage invested in stocks and other high-risk, high-return investments too quickly. 

    All current dynamic investment strategies for college savings and retirement plans start reducing the percentage invested in stocks immediately and continue to decrease this percentage monotonically. 

    Delaying the onset of reductions in the percentage invested in stocks by a number of years can increase the overall return on investment without significantly affecting investment risk.

    The duration of the initial investment in high-risk, high-return asset classes is increased and the investment glide path is then compressed to fit the remaining investment time horizon.

    Note: I invented age-based asset allocation in the early to mid-1990s, but didn’t patent it at the time. The idea was rapidly adopted by all 529 college savings plans. Now, I have patented a big improvement in age-based asset allocation and similar dynamic investment strategies. 

    Dynamic Asset Allocation for College Savings Plans

    All college savings plans offer at least one age-based or enrollment-date investment option.

    An age-based investment glide path changes the asset allocation based on the age of the beneficiary.

    An enrollment-date investment glide path changes the asset allocation based on the number of years remaining until college enrollment, similar to target-date funds for retirement.

    Typically, an age-based asset allocation moves the funds from one portfolio to another and an enrollment-date asset allocation changes the asset allocation within a single investment portfolio.

    Here’s what else to understand about dynamic investment glide paths:

  • About half of dynamic investment glide paths start out at 80% equities and about half end up with 10% equities.
  • The most common pairs of starting and ending percentages involve 100% to 30% (high risk), 80% to 20% (medium risk), 60% to 10% (low risk)
  •  More than two-thirds of investors in 529 college savings plans are invested in age-based or enrollment-date investment glide paths.
  • Here is an example of what a delayed shift can yield: 

  • Delaying the onset of a shift to a more conservative mix of investments by up to 10 years increases the annualized return on investment by up to a full percentage point without significantly increasing the overall risk of investment loss. 
  • The investment risk grows significantly if the onset of the age-based asset allocation is delayed by 11 or more years.
  • Dynamic Asset Allocation: 2 Scenarios, As It Relates to Your Retirement Plans

    Target date funds, sometimes called life-cycle funds, aim to gradually reach a particular asset allocation by a specific year.

    Here are a few scenarios and examples of what to consider in your retirement planning:

  • An investment glide path that immediately decreases the percentage invested in stocks: A common rule of thumb sets the percentage invested in stocks to 100 minus your age. So, a 20-year-old would invest 80% in stocks while a 65-year-old would invest 35% in stocks. 
  • An investment glide path that delays the percentage invested in stocks, assuming a 45-year investment horizon: Delaying the time to shift to a more conservative mix of investments by up to 30 years could increase the annualized return on investment by up to 1.4 percentage points without significantly increasing the overall risk of investment loss. However, after 30 years, the investment risk starts to increase significantly.
  • Also, if you save $250 per month, this approach can increase retirement savings by more than $200,000. It also smooths out the volatility.

    U.S. Patent No. 11,288,747, Method, System and Computer Program Product for Developing, Evaluating and Validating Investment Glide Paths, which was issued on March 29, 2022, covers all delayed-onset investment glide paths.

    Mark KantrowitzMark Kantrowitz

    Mark Kantrowitz is an expert on student financial aid, scholarships, 529 plans, and student loans. He has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, U.S. News & World Report, MarketWatch, Money Magazine, Forbes, Newsweek, and Time. You can find his work on Student Aid Policy here.

    Mark is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. He previously served as a member of the board of directors of the National Scholarship Providers Association. Mark has two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU).

    Delayed-Onset Investment Glide Paths In College Savings And Retirement PlansDelayed-Onset Investment Glide Paths In College Savings And Retirement PlansDelayed-Onset Investment Glide Paths In College Savings And Retirement Plans

    Delayed-Onset Investment Glide Paths In College Savings And Retirement Plans