Arnott: The Glidepath Illusion

September 25, 2012


The late economic historian and consultant Peter Bernstein was fascinated by the distinct difference between risk and uncertainty. Risk is, to borrow from former U.S. Secretary of Defense Donald Rumsfeld’s decision tree, the “known unknowns.” Uncertainty is the “unknown unknowns,” the black swans, the fundamental changes that can’t be anticipated. The dispersion in outcomes in Tables 1 or 2, the spread between best and worst outcomes, exemplifies risk. We can quantify it; we can predict the breadth of the range; we cannot predict where, within the range, our own experience may lie.

For most investors, the difference between Table 1 and Table 2 exemplifies uncertainty. The implications of a structural change in our starting yield are just too jolting to bear thoughtful consideration. Today’s world of negative real yields is, for most of us, a black swan, an “unknown unknown.” We want to draw our lottery samples from the past, rather than to think about the implications of a starkly different world. But a world of lower yields—and negative real yields on “riskless” assets—is neither risk nor uncertainty. It simply is our current reality. We can choose to accept this new reality, and accept that Table 2 more accurately spans our current reasonable return expectations in a low-yielding world, or we can choose to pretend that the investing world hasn’t changed in this profound way. For investors who prefer to pretend that the old norms have not changed, this “new normal” will feel like a black swan, and they will suffer accordingly.

Our message remains largely unchanged. Investors who are prepared to save aggressively, spend cautiously, and work a few years longer (because we’re living longer), will be fine. Those who do not follow this course are likely to suffer perhaps grievous disappointment. Glidepath—with less risk taken late in our working lives—is inferior to its counterintuitive inverse. But it is entirely secondary whether we choose a Glidepath strategy, an Inverse-Glidepath, or a simple 50/50 rebalanced blend. No strategy can make up for inadequate savings or premature retirement.

As always, please don’t shoot the messenger.


  1. During this period, stocks averaged an annual 8.3% return and bonds 3.9%.
  2. This example is based solely on investment returns, paired with a program of regular contributions, over the 41 years.
  3. Results available on request.

    ©2012 Research Affiliates, LLC. The material contained in this document is for general information purposes only. This material is not intended as an offer or a solicitation for the purchase and/or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisers Act of 1940 with the U.S. Securities and Exchange Commission (SEC).

    ROB ARNOTT, Chairman and Founder of Research Affiliates, LLC.


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