Vanguard is singing a new tune for investors in 2026.
It goes like this: with a standard portfolio mix of 60% equities and 40% fixed income. In contrast – 40% equity shares (20% US stocks and 20% international stocks) and 60% fixed income.
“This is a significant shift,” 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 get similar performance from high-quality (both taxable and municipal) U.S. and foreign bonds as U.S. equities — about 4% to 5% — but with less 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 U.S. stocks.
“This is a position that we suggest investors consider for the next three to five years, but it depends on risk tolerance and time horizon,” Aliaga-Diaz said.
Vanguard’s new advice is for investors with a “medium-term” outlook, and it 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 linchpin to the S&P 500’s growth these days. After a 23% gain in 2024, the S&P 500 index is up nearly 17% for the year. But analysts are increasingly concerned that they are overpriced.
“We see the overvaluation of the equity market as a risk to investors rather than an opportunity,” Aliaga-Diaz said. “Importantly, US fixed income should also provide diversification if AI disappoints and fails to deliver higher economic growth – a scenario with odds we calculate at 25%-30%.”
Many retirement savers, however, may be saving for a long time — say, to retire in two decades or more.
How does Vanguard’s new formula apply to them?
I spoke with several retirement experts who said it would be a good idea to change course.
“Given today’s high equity valuations and high bond yields, I certainly think that a more conservative portfolio could have a better risk-return profile for the next decade than in years past,” Overland Park, Kan.
“Overall, I think this reinforces the value of diversification and should serve as a warning to investors with FOMO regarding this year’s AI-driven returns,” he said.
“The end of a big year in the market is a good time to step back and ask, ‘What am I trying to achieve? Do I need to reach for returns to support my desired lifestyle?’ Remember, rate of return is not a financial goal,” added Sprick.
For retirees, the playing field can be leveled, according to Lazetta Renee Braxton, financial planner and founder of The Real Wealth Coterie.
“If you’re retired, you may not be in a place where you need extraordinary growth and want to preserve some of your current benefits by changing to 40/60, and that will be comfortable for you throughout your retirement,” she said. “It’s not about chasing returns. If you do the right calculations, with a rate of return that you think is good enough to solve your goals of earning now and not putting your money out, then 40/60 could be perfectly fine for you.”
However, many financial planners told me “no” — moving to 40/60 is not something they would advise retirement savers to do. They universally point out that a 60/40 portfolio is built around going the distance and balancing long-term growth in equities and stability with bonds.
It’s common to pull back on equity holdings as retirement approaches, meaning a 40/60 strategy isn’t common for this group. If you’re retiring within three to five years, in general, you’ll want to shift to a portfolio with less risk by diversifying more into equities and fixed income holdings.
Target date funds are designed to do just that, and they are now the investment of choice for many retirement savers.
Have a question about retirement? Personal finance? Is there anything related to career? Click here to note Kerry Hannon.
Consensus advice: tread lightly.
“I’m not asking anyone to do a hard 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,” Davis said. “It could be small-cap companies in the United States, which have lagged in the last 10 or 15 years, as well as non-US investments. Every market has followed the United States without exception.”
Added Aliaga-Diaz: “The bottom line is we don’t get the best returns from 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. He is a career and retirement strategist and author of 14 books, including “Retirement Bites: Gen X’s Guide to Securing Your Financial Future,“”In Control at 50+: How to Succeed in the New World of Work,” and “You’re never too old to be rich.” Follow her Bluesky and X.
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