Looking beyond the glide path: What really matters in a target-date investment strategy
It is not just about reducing exposure to equities over time, but also what type of securities one holds
THE introduction of life-cycle investment products through the Central Provident Fund New Investment Scheme in 2028 will give more members access to professionally managed portfolios that de-risk over time as retirement approaches, a concept known as glide path.
This is an important development. It also raises a question that investors should ask: What actually changes inside the portfolio as it moves along the glide path?
A target-date strategy is often described by how the allocation between equities and fixed income changes over time: More equities when retirement is far away, followed by a gradual shift towards bonds.
That headline glide path is useful, but it does not tell the whole story.
What matters is not only how much of equities or fixed income a portfolio holds, but also the kind of equities and fixed income.
For Singapore investors, this distinction is particularly relevant. Retirement planning involves balancing different priorities across life stages – from housing, liquidity and generating income earlier in life to preserving wealth later on.
Understanding what sits beneath the headline allocation can help members assess whether a strategy is equipped for that journey.
Look under the glide path’s hood
Many target-date strategies are built using broad market index funds. In these approaches, the equity allocation gradually declines over time, but the underlying equity exposure often remains largely unchanged.
In other words, a 35-year-old investor and a 75-year-old investor may own less equity as they move through retirement. But they are often exposed to fundamentally similar types of stocks.
A retirement journey, however, is about more than reducing the quantity of risk. It is also about changing the nature of risk.
As investors move closer to retirement, a portfolio can evolve not only by holding fewer equities, but also by holding different equities. Earlier-stage portfolios may emphasise companies with stronger growth potential and higher expected returns.
Over time, exposure may shift towards companies with more defensive characteristics, stronger balance sheets and a history of paying dividends.
The goal is not simply to become more conservative. Rather, it is to align the portfolio more closely with an investor’s changing needs as retirement approaches.
Different building blocks for different needs
Traditional asset-allocation frameworks often categorise investments by geography, market capitalisation or asset class. While these categories remain useful, they do not always reflect how investors think about their financial goals.
Most savers ultimately want some combination of three outcomes: growth, preservation and income.
Building a retirement portfolio around these objectives can create a clearer connection between investment decisions and investor needs.
Different investment strategies play different roles: contributing to capital appreciation when retirement is far away, helping preserve capital as retirement nears, or generating income once retirement begins.
Viewed this way, a target-date strategy becomes more than a formula for reducing equity exposure. It becomes a process of continually balancing competing goals across different stages of an investor’s life.
Value of active management
This flexibility is particularly relevant as markets become increasingly concentrated.
Strong returns from a small group of large technology companies are driving equity market performance, raising concentration risks for investors.
A retirement portfolio built solely on market capitalisation-weighted indices can become overly dependent on a handful of companies or sectors. Managing this risk requires ongoing decisions about what is beneath the surface of the portfolio.
Retirement investing operates on two levels: strategic asset allocation and underlying portfolio construction.
While the former sets long-term exposures across asset classes, the latter involves continuously evaluating individual securities, sectors, regions and credit opportunities.
These bottom-up decisions can help keep portfolios aligned with long-term objectives, while avoiding undue concentration risk – without relying on rigid formulas or short-term market calls.
Retirement investing is ultimately about outcomes
As retirement investing continues to develop in Singapore and across Asia, discussions often focus on products, asset allocations and investment techniques.
These are important considerations. But they are not the ultimate objective.
The real goal is to help investors accumulate sufficient savings, remain invested throughout their working lives and convert those savings into sustainable retirement income.
A glide path can help achieve that goal. But the effectiveness of a retirement strategy depends on more than how quickly it shifts from equities to bonds.
Investors should also ask what sits beneath the glide path, how the portfolio evolves over time, how risks are managed, and whether the underlying investments are aligned with the outcomes they are seeking.
Retirement investing is not simply about getting more conservative with age. It is about ensuring that a portfolio evolves alongside the investor it is designed to serve.
The writer is head of Singapore and South-east Asia client group, Capital Group
