Vanguard is singing a new tune for investors in 2026.
It goes like this: Out with the standard portfolio mix of 60% equity and 40% fixed income. In the opposite – 40% equity share (20% US stocks and 20% international stocks) and 60% fixed income.
“This is a significant change,” Roger Aliaga-Diaz, Vanguard’s global head of portfolio construction and chief economist for the Americas, told me. “It’s almost like a tectonic shift.”
Here’s what’s behind it.
Vanguard expects investors in the short term to realize returns from high-quality U.S. and foreign bonds (both taxable and municipal) similar to the performance they see from U.S. equities — about 4% to 5% — but with lower risk.
Aliaga-Diaz also expects non-US equities to outperform US stocks over the next decade. Vanguard’s outlook for international stocks is 5.1% to 7.1% per year over the next 10 years, higher than US stocks.
“This is a position that we suggest that investors consider for the next three to five years, but it depends on the risk tolerance and the time horizon,” said Aliaga-Diaz.
Vanguard’s new advice is for investors with a “medium-term” outlook, and comes from growing fears — at Vanguard and elsewhere — about an AI bubble.
The “Magnificent Seven” – Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) – are the linchpin for S&P 500 growth these days. The S&P 500 index is up about 17% for the year, after a 23% increase in 2024. But analysts are increasingly concerned that they are overvalued.
“We see that overvaluation of the stock markets more as a risk for the investor than as an opportunity,” Aliaga-Diaz said. “Importantly, US fixed income should also provide diversification if AI disappoints and fails to lead to higher economic growth—a scenario with odds that we calculate to be 25%-30%.”
Many retirement savers, however, may be saving for longer — say, to retire in two decades or more.
How does Vanguard’s new formula apply to them?
I’ve talked to several retirement experts about whether it’s a good idea to change course.
“Given today’s high equity valuations and higher bond yields, I certainly think it’s reasonable that a more conservative portfolio could have a better risk-return profile for the next decade than in years past,” Tyson Sprick, a certified financial planner with Caliber Wealth Management in Overland Park, Kan., told me.
“Overall, I think this reinforces the value of diversification and should serve as a warning to investors who have FOMO regarding this year’s AI-driven returns,” he said.
“The end of a big year in the market is a perfect time to step back and ask, ‘What am I trying to accomplish?’ Do I need to reach for an income to support my desired lifestyle?’ Remember, a rate of return is not a financial goal,” added Sprick.
For retirees, the playing field can be shaded, according to Lazetta Rainey Braxton, financial planner and founder of The Real Wealth Coterie.
“If you’re retired, you may not be where you need exceptional growth and you want to protect some of the recent gains by making that change to 40/60, and it’ll be comfortable for you throughout your retirement,” she said. “It’s not about the returns. If you’ve done the right calculations, with a rate of return that feels right for you to solve your goals about having an income now and not outliving your money, then 40/60 could be absolutely right for you.”
Many financial planners, however, told me “no”— a switch to 40/60 is not what they will advise retirement savers. They universally pointed out that the 60/40 portfolio is built around a balance of going the distance and achieving long-term growth in equities and stability with bonds.
It’s normal to pull back equity holdings as retirement approaches, meaning a 40/60 strategy isn’t out of the ordinary for this cohort. If you are retiring within three to five years, then, in general, you may want to switch to a lower risk portfolio by diversifying away from equities and more into fixed income investments.
Target date funds are designed to do just that, and are now the investment of choice for many retirement savers.
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The consensus advice: Go slow.
“I wouldn’t encourage anyone to do a drastic sell,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, told me earlier.
“This is where I say ‘stay the course,’ but start thinking about diversification,” said Davis. “It could be smaller-cap companies in the US, which have gone behind the last 10 or 15 years, as well as non-US investments. Every market has outperformed the US almost without exception.”
Added Aliaga-Diaz: “The bottom line is that we don’t get a better return than the 40/60 – we get the same return as the 60/40, but with much less risk,” he said. “That’s really the point.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky and X.
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