In 2026, Vanguard Group will sing a new song for investors.
Here’s what happens: Take a standard portfolio of 60% stocks and 40% fixed income. Instead, 40% equity (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.”
That’s what’s behind it.
Vanguard expects investors to receive returns from high-quality (taxable and municipal) U.S. and foreign bonds in the short term that are similar to U.S. stock performance (about 4% to 5%), but with less risk.
Arriaga-Diaz also expects non-U.S. stocks to outperform U.S. stocks over the next decade. Vanguard’s forecast for international stocks over the next 10 years is 5.1% to 7.1% per year, higher than U.S. stocks.
“We recommend investors consider this position over the next three to five years, but it depends on risk tolerance and time horizon,” Arriaga-Diaz said.
Vanguard’s new advice, aimed at investors with a “medium-term” outlook, stems from growing concerns at Vanguard and elsewhere about an artificial intelligence bubble.
The “Big Seven” — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA) and Nvidia (NVDA) — are key to today’s S&P 500 growth. The S&P 500 is up about 17% this year after rising 23% in 2024. But analysts are increasingly concerned that the index is overvalued.
“We believe overvaluation of stocks is more of a risk than an opportunity for investors,” Arriaga-Diaz said. “Importantly, U.S. fixed income should also provide diversification if AI disappoints and fails to deliver higher economic growth – a scenario we calculate as a 25% – 30% chance.”
However, many retirement savers may be saving for a longer period of time, such as retiring in twenty years or more.
How does Vanguard’s new formula work for them?
I spoke with several retirement experts about whether changing course would be a good idea.
Tyson Sprick, a certified financial planner at Caliber Wealth Management in Overland Park, Kan., told me: “Given the higher stock valuations today and the higher bond yields, I certainly think it’s reasonable that over the next decade more conservative portfolios may have better risk-returns than they have in the past few years.”
“Overall, I think this reinforces the value of diversification and should serve as a warning to investors with FOMO about AI-driven returns this year,” he said.
“The end of an important year for markets is the perfect time to step back and ask yourself: ‘What do I want to achieve? Do I need returns to support the lifestyle I want?’ Remember, returns are not a financial goal,” Sprick added.
Lazetta Rainey Braxton, financial planner and founder of The Real Wealth Coterie, said the playing field can be tricky for retirees.
“If you’re a retiree, you may not need extraordinary growth and want to protect some recent gains by switching to 40/60 so you’ll be comfortable throughout retirement,” she says. “It’s not about chasing returns. If you do the math correctly and the returns make you feel good about achieving your goal of having an income now and not blowing your money away, then 40/60 is absolutely fine for you.”
However, many financial planners tell me “no”—they would not advise retirement savers to switch to 40/60. They generally point out that a 60/40 portfolio is built around a balance of long-term growth in stocks and stability in bonds.
It’s normal to reduce your stock holdings as retirement approaches, meaning the 40/60 strategy is not uncommon for this group. If you are retiring in three to five years, then generally speaking, you may want to move toward a less risky portfolio by diversifying into fixed-income holdings through stocks.
Target-date funds are designed to do just that, and they’re now the investment of choice for many retirement savers.
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Consensus advice: Walk softly.
“I wouldn’t urge anyone to do a big sell-off,” Joseph Davis, global chief economist at Vanguard Group and head of Vanguard Investment Strategy Group, previously told me.
“That’s what I say about ‘stay the course,’ but start thinking about diversification,” Davis said. “It could be U.S. small-cap companies that have lagged over the past 10 or 15 years, or it could be non-U.S. investments. Almost without exception, every market has lagged the U.S.”
Aliaga-Diaz added: “The bottom line is that we don’t get better returns from 40/60 – we get the same returns 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 Living: Gen X’s Guide to Securing a Financial Future,” “Taking Charge in Your 50s: How to Succeed in the New World of Work” and “You are never too old to be rich. “Follow her and continue blue sky and X.
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