Vanguard is singing a new song for investors in 2026.
Here’s how: with the standard portfolio mix of 60% equities and 40% fixed income. Instead, an equity ratio of 40% (20% US stocks and 20% international stocks) and 60% fixed income stocks.
“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 to get near-term returns from high-quality U.S. and foreign bonds (both taxable and municipal) similar to the performance they’d see from U.S. stocks — about 4 percent to 5 percent — but with less 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% per year over the next 10 years, higher than U.S. stocks.
“This is a position 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 aimed at investors with a “medium-term” outlook and stems from growing fears — at Vanguard and elsewhere — of an AI bubble.
The “Magnificent Seven” — Apple ( AAPL ), Alphabet ( GOOGL , GOOG ), Microsoft ( MSFT ), Amazon ( AMZN ), Meta ( META ), Tesla ( TSLA ) and Nvidia ( NVDA ) — are key to the S&P 500’s rise these days. The S&P 500 is up about 17% for the year, after a 23% gain in 2024. But analysts are increasingly concerned that they are overvalued.
“We see the overvaluation of equity markets as more of a risk for the investor than 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 we calculate to be 25%-30% likely.
However, many pension savers can save for longer – say, to retire in two decades or more.
How does the new Vanguard formula apply to them?
We talked to several retirement experts about whether it’s a good idea to change course.
“Given today’s high stock valuations and higher bond yields, I think it’s reasonable for a more conservative portfolio to have a better risk-return profile over the next decade than in years past,” Tyson Sprick, a certified financial planner at 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 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 make a profit to support the lifestyle I want?’ Remember, a rate of return is not a financial goal,” added Sprick.
For retirees, the playing field can be nuanced, according to Lazetta Rainey Braxton, financial planner and founder of The Real Wealth Coterie.
“If you’re a retiree, you may not be in a place where you need an exceptional growth and you want to protect some of the recent gains by making that change to 40/60, and you’ll be comfortable throughout retirement,” she said. “It’s not about chasing returns. If you’ve done the right math, with a rate of return that feels good to address your goals of having income now and not living beyond your means, then a 40/60 could be absolutely fine for you.”
A lot of financial planners, however, have told me no – going 40/60 is not what they’ll advise retirement savers to do. They universally emphasized that the 60/40 portfolio is built around the balance of going the distance and achieving long-term growth in stocks and stability with bonds.
It’s normal to pull back on 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 you may generally want to move to a less risky portfolio, diversifying away from stocks and more into fixed income holdings.
Target date funds are designed to do just that, and are now the investment of choice for many retirement savers.
Have a question about retirement? Personal finance? Something career related? Click here to send Kerry Hannon a note.
Consensus Tip: Go slow.
“I wouldn’t urge anyone to sell drastically,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, told me previously.
“This is where I say ‘stay the course,’ but I’m starting to think about diversification,” Davis said. “It could be smaller-cap companies in the United States that have been lagging for the last 10 or 15 years, as well as non-U.S. investments. Every market followed the United States almost without exception.”
Aliaga-Diaz added: “The bottom line is that we’re not getting better returns from 40/60 – we’re getting the same return as 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 further Bluesky and X.
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