A good example of bad timing is someone who retired around 2000. They quickly faced a bear market in 2001 to 2002, when a traditional dynamic glidepath likely had them at around 60% equity exposure. Then, their equity exposure would have been reduced at the very beginning of the bull market that began in 2010, with another equity reduction likely coming around 2015 as the bull was still running. If the retiree is not taking withdrawals, it is possible for their accounts to have recovered by now. But if they are taking withdrawals — and isn’t that the whole point of a retirement account for a retiree? — they may very well be underwater.
For this same year 2000 retiree, a dynamic glidepath would have changed the asset allocation based only on the market conditions, irrespective of the individual’s age.
Hortz: Can you describe what you mean by “dynamic glidepath” in more detail?
Robinson: This is explained fully in the Guide, but at a high level, a dynamic portfolio seeks to continually take advantage of strong-performing asset classes while also attempting to minimize exposure to those showing weakness. This means the portfolio can look dramatically different depending on the market conditions at the time of and throughout retirement.
Here is an example: Let us say equities are rising and volatility is low when someone enters retirement. In these conditions, a dynamic glidepath and traditional glidepath portfolio are likely to look about the same.
Now, let us reverse the situation. Imagine that equities are falling and volatility is high at the time someone enters retirement. The traditional glidepath likely would be at a 60/40 allocation, but a dynamic glidepath might be designed to position the investor at something closer to 25/75, for instance. However, once volatility decreased and equities regained strength, a dynamic glidepath could seek to readjust the allocation to again favor equities.
The whole point is to try to protect capital when conditions are poor but stay aggressive when conditions are favorable.
Hortz: You mentioned that you wanted to test if the dynamic glidepath presents a viable alternative to the traditional glidepath. However, with rates rising and given the recent performance of the 60/40, isn’t now actually a good time to use the traditional balanced approach?
Robinson: You are not the first person to bring this up.
I think the best way to answer this question is to throw out another one: Is it worth making that bet? If an advisor is going “all in” on the 60/40 model now that it has been beaten up, they are essentially market timing.
A dynamic glidepath is different because if developed objectively, it takes timing the market out of the equation. A systematic investing process that makes the allocation decisions can be rooted in price data, not a gut feeling about the market’s upcoming direction. There is no prediction involved.
Advisors are not locked into one environment. So, if the 60/40 has another good run, in theory so too should a dynamic glidepath. And if the 60/40 continues to struggle, a more dynamic glidepath can be built to have a plan for managing risk in those environments too.