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, and in with the opposite — a 40% equity share (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 realize returns from high-quality (both taxable and municipal) US and foreign bonds similar to the performance they would see from US 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 we suggest investors consider for the next three to five years, but it depends on risk tolerance and time horizon,” Aliaga-Diaz said.
Learn more: A step-by-step guide to retirement planning
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 for the S&P 500’s growth these days. The S&P 500 index rose about 17% for the year, after a 23% gain in 2024. But analysts are increasingly concerned that they’re overvalued.
“We see that overvaluation of equity markets more as a risk to the investor than as opportunity,” Aliaga-Diaz said. “Importantly, US fixed income should also provide diversification if AI disappoints and fails to usher in 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?
Learn more: Average retirement savings by age: How do you compare?
I 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 may have a better risk-return profile for the coming 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 having FOMO with regards to 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 returns to support my desired lifestyle?’ Remember, a rate of return is not a financial goal,” Sprick added.
For retirees, the playing field can be nuanced, according to Lazetta Rainey Braxton, a financial planner and founder of The Real Wealth Coterie.
“If you’re a retiree, you may not be where you need exceptional growth and want to protect some of the recent gains by making that shift to 40/60, and it’ll be comfortable for you throughout your retirement,” she said. “It’s not about chasing returns. If you’ve done the right calculations, with a rate of return that feels good for you to solve your goals about having income now and not outliving your money, then a 40/60 could absolutely be totally fine for you.”
Lots of financial planners, however, told me “nope”— shifting to 40/60 is not what they will advise retirement savers. They universally pointed out that the 60/40 portfolio is built around balance to go the distance and achieve long-term growth in equities and stability with bonds.
It’s normal to pull back on equity holdings as retirement nears, meaning a 40/60 strategy is not out of the ordinary for this cohort. If you’re retiring within three to five years, then, generally speaking, you might want to shift to a portfolio with less risk by diversifying out of equities and more into 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 finances? Anything career-related? Click here to drop Kerry Hannon a note.
The consensus advice: Walk softly.
“I would not urge anyone to do drastic selling,” Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group, previously told me.
“This is where I say ‘stay the course,’ but start thinking about diversifying,” Davis said. “It could be smaller-cap companies in the United States, which have trailed over the past 10 or 15 years, as well as non-US investments. Every market has trailed the United States almost without exception.”
Added Aliaga-Diaz: “The bottom line is we don’t get better 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. 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.
Sign up for the Mind Your Money newsletter
Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more
Read the latest financial and business news from Yahoo Finance
