Vanguard is singing a new song for investors in 2026.
Here’s how it works: with the standard portfolio mix of 60% equity and 40% fixed income. Quite the opposite: 40% equity interest (20% U.S. stocks and 20% international stocks) and 60% fixed income.
“This is a significant shift,” Roger Aliaga-Diaz, Vanguard’s head of global portfolio construction and chief economist for the Americas, told me. “It’s almost like a tectonic shift.”
So what’s behind this?
Vanguard expects investors in the short term to see returns from high-quality (both taxable and municipal) U.S. and foreign bonds similar to the performance they would see from U.S. stocks — about 4% to 5% — but with lower risk.
Aliaga-Diaz also expects non-U.S. stocks to outperform U.S. stocks over the next decade. Vanguard’s outlook for international stocks is 5.1% to 7.1% annually for the next 10 years, higher than for U.S. stocks.
“This is a position we recommend investors consider over the next three to five years, but it depends on risk tolerance and time horizon,” Aliaga-Diaz said.
Vanguard’s new advice is aimed at investors with a “medium-term” perspective and stems 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 cornerstone of the S&P 500’s growth these days. The S&P 500 index is up about 17% this year, following a 23% rise in 2024. But analysts are increasingly concerned that the indexes are overvalued.
“We see the overvaluation of stock markets as a risk rather than an opportunity for investors,” Aliağa-Diaz said. “Importantly, US fixed income also needs to diversify if AI disappoints and fails to deliver higher economic growth; we calculate the odds at 25%-30% in this scenario.”
However, many retirement savers may be saving for a longer period of time; for example, to retire in twenty years or more.
How does Vanguard’s new formula apply to them?
I spoke with several retirement experts about whether it’s a good idea to change course.
“Given today’s high equity valuations and high bond yields, I think it’s certainly plausible that a more conservative portfolio will have a better risk-return profile over the next decade than in years past,” said certified financial planner Tyson Sprick. Caliber Asset Management he told me in Overland Park, Kan.
“Overall, I think this reinforces the value of diversification and should serve as a warning to investors with FOMO about this year’s AI-driven returns,” he said.
“The end of a big year in the market is the perfect time to step back and ask: ‘What am I trying to achieve? Do I need to achieve returns to support the lifestyle I desire?’ Remember, rate of return is not a financial goal,” Sprick added.
The playing field for retirees can be nuanced, according to financial planner and founder Lazetta Rainey Braxton. Real Wealth Group.
“If you’re retired, you may not be where you need extraordinary growth and you may want to preserve some of your recent gains by switching to 40/60 and that will be comfortable for you throughout your retirement,” he said. “It’s not about chasing returns. If you’ve done the right calculations, at a rate of return that feels good for you to solve your goals of generating income now and not outliving your money, then 40/60 can definitely be good for you.”
But many financial planners told me “no”; Switching to 40/60 is not what they would recommend to retirement savers. They note that universally the 60/40 portfolio is built around balance to go the distance and provide long-term growth in stocks and stability with bonds.
It’s normal to withdraw stock holdings as retirement approaches, so a 40/60 strategy is not unusual for this group. If you’re retiring in three to five years, generally speaking, you may want to move to a less risky portfolio by diversifying more into fixed income assets than equities.
Target date funds are designed to do just that and have now become the investments of choice for many retirement savers.
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Common advice: Walk slowly.
“I wouldn’t encourage anyone to do serious selling,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, previously told me.
“At this point I say ‘stay the course,’ but start thinking about diversification,” Davis said. “These could be non-U.S. investments as well as smaller-sized companies in the U.S. that have been lagging for the last 10 or 15 years. Almost without exception, every market has followed the U.S.”
“The bottom line is we don’t get better returns than 40/60; we get the same return as 60/40, but with much less risk,” Aliaga-Diaz added. “That’s actually the point.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. He is a career and retirement strategist and the author of 14 books: “Retirement Bites: The Generation X Guide to Securing Your Financial Future,” “You’re in Control at 50+: How to Succeed in the New Business World?,” and “Never Too Old to Be Rich.” Follow him blue sky And X.
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