Asset Allocation in Your 40s: The Glide Path Begins

Your 40s represent a pivotal moment in your investment journey. Retirement is no longer an abstract concept decades away—it's becoming a tangible destination on the horizon. Yet you likely still have 20-25 years of investing ahead. This is where the art of the glide path begins.

The Glide Path Concept

A glide path is the gradual shift in your portfolio's asset allocation from aggressive to conservative as you approach retirement. Think of it like an airplane's descent—you don't drop from cruising altitude to the runway in one dramatic move. You make a gradual, controlled descent.

Target-date funds popularized this concept, automatically adjusting your allocation as you age. But understanding the principles behind the glide path empowers you to make smarter decisions, whether you use target-date funds or manage your own allocation.

The 40s Sweet Spot

Here's what makes your 40s unique: you have enough time to recover from market downturns, but you're also at peak earning years with the ability to make significant contributions. This combination calls for a balanced approach.

The old rule of thumb—"subtract your age from 100 to get your stock percentage"—would put a 45-year-old at 55% stocks. Most financial planners now consider this too conservative for today's longer lifespans. A more modern approach might suggest "subtract your age from 110 or 120."

Why Not Go More Conservative?

It's tempting to dramatically reduce risk as you see retirement on the horizon. But consider this: if you retire at 65, you may have 30+ years of retirement ahead. Your money needs to grow during retirement too.

Being too conservative too early creates its own risk—the risk that your portfolio won't keep pace with inflation over your long retirement. A portfolio that's too bond-heavy might feel "safe," but it may not generate the returns needed to sustain a 30-year retirement.

The Sequence of Returns Risk

One legitimate reason to start reducing stock exposure in your 40s and 50s is sequence of returns risk. This is the danger that a market crash right before or in early retirement could devastate your portfolio when you're starting to make withdrawals.

By gradually reducing equity exposure as you approach retirement, you create a "buffer zone" of more stable assets. If the market drops 40% when you're 45, you have time to recover. If it drops 40% when you're 64 and planning to retire at 65, that's a different situation entirely.

How to Adjust Your Allocation

Rather than making dramatic shifts, consider small annual adjustments:

• Ages 40-45: Target around 80% stocks, 20% bonds
• Ages 45-50: Shift to around 75% stocks, 25% bonds
• Ages 50-55: Move toward 70% stocks, 30% bonds
• Ages 55-60: Consider 65% stocks, 35% bonds
• Ages 60-65: Approach 60% stocks, 40% bonds

These are guidelines, not rules. Someone with a generous pension might be able to stay more aggressive. Someone planning early retirement might need to shift earlier.

Within Stocks: Quality Matters More

As you enter your 40s, consider not just how much you have in stocks, but what kind of stocks. This is a good time to ensure your equity allocation is well-diversified:

• US large-cap: The core of most portfolios
• US small and mid-cap: For growth potential
• International developed: Europe, Japan, Australia
• Emerging markets: Higher risk, higher potential return

A total world stock market index fund can accomplish this diversification in a single fund, making it an elegant solution for the zen investor.

Bonds: Not Just "Safe" Assets

As bonds become a larger portion of your portfolio, understand what you're buying:

• Total bond market funds: A mix of government and corporate bonds
• Treasury bonds: The safest option, backed by the US government
• TIPS: Treasury Inflation-Protected Securities, which adjust for inflation
• Corporate bonds: Higher yield, higher risk than government bonds

Many investors in their 40s benefit from a total bond market index fund, which provides broad diversification across bond types and maturities.

The Rebalancing Discipline

Whatever allocation you choose, rebalancing becomes increasingly important. When stocks have a great year, they'll grow to represent a larger portion of your portfolio than intended. Rebalancing means selling some stocks and buying bonds to return to your target allocation.

This feels counterintuitive—selling your winners and buying your losers. But it enforces a "buy low, sell high" discipline and keeps your risk level consistent with your plan.

The Zen Perspective

Your 40s are about finding balance—between growth and preservation, between optimism and prudence. The glide path isn't about fear of the market. It's about gradually preparing for a transition while still participating in the growth that will fund your retirement.

Don't obsess over finding the "perfect" allocation. A reasonable allocation that you stick with through market ups and downs will outperform a "perfect" allocation that you abandon during a crash. The best portfolio is one you can hold through anything.