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Reply to Peter: Why a glide path makes sense, with equities for growth

My last article, The glide from youth into life after work, prompted a response from Peter Thornhill (PT hereafter) who “noticed with sadness” the support for 'lifecycle' investing. When someone distinguished says that about a piece you’ve written, it takes you aback. On reading his piece, I gather (this is a guess on my part) he thinks I’m endorsing volatility as the risk measure that leads to a glide path. I neither said nor implied it.

In keeping my article short, I focused on the human-interest aspect. Let me get to grips with risk in this piece. And you’ll find I agree with PT in many ways, and yet I still advocate a glide path.

PT’s approach is straightforward: over the long term, equities invariably outperform fixed income, so they are the obvious choice for accumulation. I agree with both parts of that statement, but there’s more to it than that.

Here, I’ll define risk and then apply that definition to investing. Then I’ll show how it works in the accumulation and decumulation phases of retirement planning (quite differently, it turns out).

And you’ll be glad to know that it takes no expertise to understand this stuff.

What is risk?

Risk is the chance of an adverse outcome. As simple as that.

What is adverse depends on the situation and on how the risk-taker defines the goal and the difference between acceptable and adverse outcomes. So, what’s adverse to one person may be acceptable or even favorable to another. Risk is necessarily subjective.

What is investment risk?

This is the chance of an adverse outcome in an investment context. As simple as that.

I have never found a better framework for analysing risk than that of William Bernstein, in his little gem of a book called Deep Risk. He distinguishes between ‘shallow risk’ and ‘deep risk’. Shallow risk is the risk that we’re forced to interact with the market at a bad time. We’re forced to buy right after the market has gone up, or to sell right after it’s gone down. It makes sense for volatility to be a good measure of shallow risk. Much of what’s called Modern Portfolio Theory is based on this concept. In many circumstances, it’s an avoidable and therefore irrelevant risk, as I’ll show.

Deep risk is much more serious. It’s the risk that the economy, and therefore the stock market, doesn’t perform over the long term. This is what places us all in retirement jeopardy. And sadly, it’s unavoidable.

I won’t get into Bernstein’s complete analysis, I’ll just go with PT’s flow, that equities give the average investor by far the best chance of achieving long-term growth.

The impact of shallow risk on an individual’s retirement finances

How can you escape shallow risk?

In the accumulation phase, you don’t really need to. It has little effect because you’re investing regularly. Volatility just means that sometimes you’ll buy high and sometimes low. This is often called ‘dollar cost averaging’. As long as it’s just volatility around a long-term upward path, in fact volatility is your friend, as a buyer.

Suppose, for example, you invest $100 per period. Suppose the price at which you buy is a constant $100. Then each period you buy 1 unit. After two periods you have bought 2 units. But suppose the price isn’t a constant $100. Suppose it alternates, sometimes $90 and sometimes $110. Then, in two periods, you buy 2.02 units. What if it alternates between $80 and $120? Then in two periods you buy 2.08 units. The more volatility, the more units you own. Far from being a risk, (pure) volatility in the accumulation phase is your friend.

In the decumulation phase, exactly the opposite holds true. Now you’re selling, to generate the cash you need for spending. And to generate $100 per period in those scenarios, you need to sell 2 units, or 2.02 units, or 2.08 units. The more (pure) volatility there is, the more units you sacrifice and the worse off you are. Now volatility becomes your enemy, and it becomes a form of risk, as the outcome is adverse for you, relative to the absence of volatility.

Can you avoid it? Yes, but at a cost.

If you need $100 a period, you can arrange your assets to generate exactly $100 when needed. This requires investments with explicit, certain outcomes. Typically, these investments have a low return, with no long-term growth potential, so you have a trade-off. The more you seek long-term growth, the smaller the portion of your portfolio available to generate exact amounts when you need them. The more predictability, the less available to seek long-term growth.

Fortunately, the need for predictability doesn’t occur, in a retirement context, until decumulation.

The lifecycle rationale

What’s the rationale for reducing exposure to growth-seeking assets over the accumulation lifetime?

The theory is simple. You have two kinds of assets. One is human capital: the ability to earn income through work, which in turn creates the ability to save for retirement. The other is financial capital: the value of what you’ve saved. At any time, your personal asset portfolio is the sum of the two. (Google “Bodie Merton Samuelson 1992” if you want details.)

An essential assumption in the theory is that your tolerance for (or aversion to) a large one-shot decline in your portfolio is constant over your lifetime (aka ‘constant relative risk aversion’ or CRRA).

Your human capital is (in this theory) viewed as a form of reasonably predictable inflation-linked fixed income, rather than a risky/growthy asset such as equities. The theory argues that growthy assets have far greater uncertainty than your human capital. In particular, as far as risk (in this context, a significant permanent decline in value) is concerned, growthy assets are far more susceptible than human capital.

Let’s suppose you invest all your savings in growthy assets. Over time, your savings get bigger and your human capital declines. That means that your total personal portfolio has an increasing proportion in growthy assets. Your exposure to risk increases over time. The way to keep it constant (remember CRRA) is to replace growthy assets with assets that look more like human capital (essentially, inflation-linked fixed income with a time horizon that ends at retirement).

That’s what a glide path is meant to do.

Actually, it’s more complicated than that, because right at the start you have no growthy assets at all, so you actually have too little risk exposure. What you need to do, at least in principle, is borrow against your human capital and invest the borrowed amount in growthy assets. In most countries you can’t do this explicitly with your retirement savings, but you can achieve the right direction to some extent if you buy a property financed by a mortgage.

How does this relate to the discussion on risk?

It relates purely to deep risk, not shallow risk.

The glide path’s rationale is based on a constant tolerance of exposure to risk of a significant one-shot decline. That’s a form of deep risk. It has to be a decline that isn’t recovered later; if it’s recovered, that’s just volatility, and remember, volatility is your friend in the accumulation phase.

What about later, during retirement decumulation? PT says that in retirement he’s interested in the income from the equities, and volatility in value is a non-issue. Not so! If PT doesn’t need to touch the capital, then financing retirement isn’t his focus; he has ample wealth. Fair enough, in that case. But the average person doesn’t have that luxury, and needs to sell regularly to generate spending money. And therefore volatility is indeed a potentially big issue after retirement, for the average person.

If we have to sell right after a big decline, those units have gone forever. They aren’t there to claw back anything from mean reversion. This is the danger often called ‘sequencing risk’.

I partially avoid shallow risk personally by having five years of spending in savings bonds or fixed-term deposit accounts. This is my ‘spending ladder’. Each year, the ladder naturally shortens by one year. If markets have been good, I’ll extend it by a year, back to five. If markets have fallen, I’ll wait for a recovery. My risk, of course, is that there’ll be five years without a recovery. Then I’ll be in trouble, but so will we all, and that’s my unavoidable exposure to deep risk. I wish I could afford a 15-year ladder. But holding that amount in fixed income wouldn’t give me as much exposure to the long-term growth I still hope for. It’s my trade-off.


I’ve tried to show that risk is subjective, that shallow risk is your friend in accumulation and your enemy in decumulation, and that even in decumulation it’s potentially avoidable for some time, giving growthy assets a chance to work for you. Deep risk is always with us. The glide path is a sensible way to keep our exposure to deep risk relatively constant throughout the accumulation period.


Don Ezra has an extensive background in investing and consulting and is also a widely-published author. His current writing project, blog posts at, is focused on helping people prepare for a happy, financially secure life after they finish full-time work.

David Cvengros
July 16, 2020

Risk is not "the chance of an adverse outcome." Risk is a person's ability to recover from an adverse outcome. In other words, a downturn in asset value (an adverse outcome) is irrelevant as long as I do not need the money (inability to recover). An example, starting a business may seem risky unless I am independently wealthy. If the business fails, I have not put my standard of living or ability to start another business at risk. This is what William Bernstein was saying.

Besides that, PT is correct. The opportunity cost is huge.

Peter Thornhill
March 22, 2018

Don, there is a significant opportunity cost of the glide path strategy. Throughout a working life, the end result is compromised by this changing asset allocation.

Don ezra
March 19, 2018

Yes, the glide path deals only with accumulation, and considers it as having essentially an indefinite horizon -- which changes dramatically when decumulation starts. I said nothing at all about the glide path in decumulation.

Again: the accumulation glide path is a default accumulation strategy that's superior to a level equity exposure. That's it.

Alun Stevens
March 19, 2018

I have a lot of difficulties with what, to my mind, is a simplistic view of the issue.

The argument falls apart at the third paragraph of the fifth section that states that 'an essential assumption in the theory is that your tolerance for a large one-shot decline in your portfolio is constant over your lifetime.' I regard this assumption as invalid for considering and modelling retirement saving and spending.

The second failure is that the only financial risk being considered is badly timed (in relation to spending desires) falls in asset values. An equally or more important financial risk for today's long lived retirees is the long term, slow, insidious erosion of value because of underperformance against inflation. None of the lifecycle portfolios I have looked at do particularly well at the first risk and they all do very badly at the second. The investors have a comfortable, smooth, downhill slide into starvation.

The third failure is the statement that retirees need to sell down assets each year to meet income needs. They will have to sell assets over time, but not every year. Equities generate a solid and stable flow of cash from dividends. This is a regular underpinning for spending. If a cash buffer is held, the dividend flow can obviate the need for selling for some time.

A five year cash/bond buffer, from my modelling, is too big. It will deliver a large cash drag on earnings. The risk premium paid via this underperformance is excessive for the risk being covered. A two year buffer is more realistic even if you might get caught occasionally and need to see some depressed value assets for short term cash flow. This occasional and small loss of value is preferable to persistent, frequent small losses.

Lifecycle portfolios are very high risk for long term investing and retirement investing is long term even if it is shorter than accumulation investing.

Peter Grace
March 15, 2018

What about the retirement bucket system? You hold enough in a cash bucket to be able to pay your pension for the year. You top up the cash bucket with income from your growth investments. You have a second capital stable bucket with two or three years of income - that's there to ensure you never have to sell assets from the third growth bucket to fund your pension. This means you might have 80% to 85% of your portfolio in growth assets and you don't worry about volatility. It's worked for me pre, during and post the GFC. If a deep risk event occurs we'll all be in the proverbial barbed wire canoe however we invested.

Don ezra
March 19, 2018

Perfect! In decumulation, horizon considerations apply, and safety means having the right amount in your bucket without having to sell after a market decline. Your approach in decumulation is the one I use myself.

Peter Thornhill
March 22, 2018

Couldn't agree more Peter. I'm lucky having ensured the maximum exposure to equities during the accumulation phase (including gearing), this has left us with substantially more than had we followed the glide path scenario. Can't find a period in the last 117 years where there is a period of more than two consecutive years of negative returns.

Greg Cooper
March 15, 2018

Part of the point that is being made is that (rightly) money weighted risks and path dependency are important. We dont have constant capital in the normal accumulation/decumulation model. A 10% loss on $100,000 of capital has a different financial impact to a 10% loss on $1,000,000 of capital - for a given salary, contribution or spending rate. Unlike schemes that pool performance across many members and time frames (e.g. defined benefit schemes), the single person model needs a different approach.

However, the problem with BOTH existing balanced type approaches and lifecycle approaches is that they assume that risk and expected return are relatively constant through time and proportionately similar across asset classes (e.g. equities are riskier than bonds are risker than cash). This is simply not true. In fact stochastically balanced type models and lifecycle models give a very similar range of outcomes (measured as spending in retirement). This is not surprising as the average asset allocation through time of a lifecycle fund looks like.....a balanced fund!

Rather than debate my asset allocation model that is independent of market expectations of risk and return is better than your asset allocation model that is also independent of market expectations of risk and return, we should probably reframe the problem as one of investing for a particular goal and utilise market expectations of risk and return (e.g. valuations) as a significantly stronger input.

High allocations to equities are not an issue when return expectations are high. They are dangerous for all (but especially those in drawdown) when return expectations are low. Both fixed asset allocation and glidepaths (which are also "fixed" but in another way) are ignorant of this point.

Don ezra
March 19, 2018

Right! Whenever we can customize the path of asset allocation, we should. The glide path is meant purely in accumulation (decumulation is entirely different) for those who want a default; for them, it assumes constant relative risk aversion with an indefinite horizon (whereas in decumulation, horizon is extremely important and declines over time). Whenever you know your goal(s) and your (potentially changing path of) risk tolerance, customize. A declining glide path in accumulation simply claims dominance over a constant allocation, that's all.

Peter Vann
March 15, 2018

Am I missing something? Or did Don!

If one’s objective is to fund consumption through retirement, then the outflows funding this consumption is a liability and should be included in the portfolio of assets and human capital. And risk may be viewed as the likelihood of ruin in retirement, ie you run out of money (ignoring the age pension).

Thus one can’t apply the assumed ‘constant relative risk aversion’ just to the portfolio of assets and human capital as described in the above article and draw such simple conclusions as stated above. Whilst I found it an interesting read, it doesn’t (IMHO) cover the full situation since the characteristics of the “personal portfolio” used in the above article are one component in the analysis.

Numerous recent studies undertaking a full stochastic asset liability analysis with risk relating to something like shortfall in funding retirement expenditure have shown that higher equity allocations than defaults in superfunds will fund better retirement outcomes and that glide paths are not necessarily better in practise (eg see my comment to Don’s previous post). Glide paths may have a role for funding expenditure at one target date.

There is nothing new in this full asset liability analysis since the framework has been used by actuaries for decades in defied benefit schemes (albeit they contain multiple members).


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