The Financial Engineering in the Patented Safe Landing Glide Path™
The patented Safe Landing Glide Path™ (SLGP) embodies two Nobel prize winning theories, risk of loss analysis, and liability-driven investing. Dr. Harry Markowitz won the Nobel prize in 1990 for his work on the Efficient Market Hypothesis that states that investment diversification increases the return that investors earn for the risk they take. In the same year, Dr William F. Sharpe also won a Nobel for his Capital Market Line that showed that risk is best controlled by blending a broadly diversified world portfolio with a risk-free asset like Treasury bills; the alternative of moving to safer assets, like bonds, is still the common practice, although it’s not the smartest. Risk of loss avoidance estimates the worst case loss from today to a date in the future. Liability-driven investing protects current assets by moving out of the way of the worst case loss into safe investments; this is not market timing – it’s risk management.
The two key elements of the SLGP are (1) when to start applying the brakes, and (2) how forcefully.
- Apply the Brakes. The glide path begins to protect when the horizon is short enough to experience a risk of loss. It is highly unlikely that an investor in a well diversified portfolio of risky assets will experience a loss over a 15 year period. Accordingly, this risk-of-loss rule argues that the brakes are first applied at 15 years to target date.
- How forcefully. The magnitude of transfer from risky to protective asset is determined using the principles of liability-driven investing (LDI). Sufficient assets are set aside in a protective asset such that, even if the worst case, risky return is realized over the horizon the total account balance is insulated from loss. This structure leads to a non-linear glide path because transfers increase exponentially as the target date nears.
In retirement, past the target date, the SLGP re-risks in accordance with the research conducted by Dr. Wade Pfau and Michael Kitces in their seminal research entitled Reducing Retirement Risk with a Rising Equity Glide Path.