Why Vanguard Thinks It’s Time to Flip the 60/40 Investment Rule
The 60/40 rule has long been treated as a steady blueprint for building wealth. Sixty percent in stocks for growth, forty percent in bonds for stability—it sounds balanced, predictable, and safe. Yet that balance is now being questioned. Vanguard, one of the world’s largest investment firms, is suggesting that for some investors, it may be time to flip the formula entirely.
Instead of leaning heavily on stocks, Vanguard is pointing toward a 40/60 mix. The idea is simple but bold: hold fewer stocks, hold more bonds, and aim for similar returns with less turbulence along the way.
What the 60/40 Rule Was Designed to Do
At its core, the traditional 60/40 portfolio aims to smooth out the ride. Stocks are expected to fuel growth, though they come with sharp ups and downs. Bonds typically move more slowly, offering income and cushioning losses when markets stumble. Together, the two were meant to strike a workable balance between risk and reward.
For decades, that structure held up well. However, recent market history has changed the conversation.
Stocks Have Had an Unusual Run
Freepik | DC Studio | Some investors shift to 40% stocks and 60% bonds to reduce risk while still seeking steady growth.
Over the past ten years, the S&P 500 has surged roughly 216%, averaging close to 12% annually, according to data cited by The Motley Fool. Dan Caplinger, contributing analyst and financial planning expert at The Motley Fool, describes the period as “an extraordinarily above-average” stretch of stock market performance lasting more than a decade.
Bonds tell a different story. The Vanguard Total Bond Market Index Fund shows a five-year average return of about -0.5%, highlighting just how far bonds have lagged while stocks soared.
That gap has led many investors to abandon bonds altogether. Yet Vanguard believes this reaction may be backward-looking.
Who the 40/60 Approach Is Really For
The revised allocation is not a universal fix. Vanguard emphasizes that portfolio construction should reflect time horizons and spending needs. Investors who expect to use part of their savings within five to ten years often face higher stakes if markets turn volatile.
Roger Aliaga-Díaz, Vanguard’s global head of portfolio construction, explains it plainly: when financial goals sit within a shorter window, how assets are allocated becomes far more important.
For this group—those nearing retirement, planning for college costs, or saving for a home—Vanguard sees a strong case for dialing back stock exposure.
Why Vanguard Thinks Stocks Are Overpriced
One key metric behind Vanguard’s view is the cyclically adjusted price-to-earnings ratio, commonly called the CAPE ratio. This measure compares stock prices to long-term earnings to gauge whether markets look stretched or cheap.
As of December 22, the CAPE ratio for the S&P 500 stood at 40.40. That level is rare. The only comparable period was during the peak of the dot-com bubble in 1999–2000, a time that ended with a painful market correction.
Aliaga-Díaz notes that “by almost any measure,” U.S. equities appear overvalued. At the same time, enthusiasm around artificial intelligence has fueled sharp gains in large technology stocks, prompting frequent discussion of a possible AI-driven bubble.
Caplinger adds a note of caution: extended streaks of outperformance usually come to an end, even if timing that shift is difficult.
Vanguard’s Forecast
Looking forward, Vanguard expects stock returns to cool significantly. Over the next decade, growth stocks—including the so-called Magnificent Seven tech companies—are projected to return just 2.3% to 4.3% annually. For the broader U.S. stock market, expected gains fall in the 3.5% to 5.5% range.
Bonds, by contrast, appear more competitive. Vanguard projects annual returns of 3.8% to 4.8% for U.S. bonds, with even higher expectations for international bonds.
This shift in outlook is central to the 40/60 argument. According to Aliaga-Díaz, a portfolio weighted more toward bonds could deliver similar returns to a traditional 60/40 mix while taking on roughly half the risk over the next five to ten years.
How a 40/60 Portfolio Breaks Down
Freepik AI | Vanguard’s new approach trades static 60/40 rules for market-driven stability and growth.
Vanguard outlined a sample allocation in a December report that spreads risk across asset classes and regions:
36% U.S. bonds
24% international bonds
15% U.S. value stocks
14% international stocks
6% U.S. growth stocks
5% U.S. small-cap stocks
Beyond the bond-heavy tilt, the structure emphasizes stock categories Vanguard expects to perform relatively well in a slower-growth environment.
Value stocks, which trade at lower prices relative to earnings and sales, are projected to return 5.8% to 7.8% annually. Small-cap stocks are forecast to gain 5.1% to 7.1% per year, offering a way to reduce reliance on mega-cap tech. International stocks also stand out, with expected returns of 4.9% to 6.9%, higher than U.S. equities overall.
Aliaga-Díaz links all of these choices to one central concern: the elevated pricing of the largest U.S. technology companies.
Why Many Investors Still Resist Bonds
Despite the numbers, skepticism remains. Years of weak bond performance have left many investors wary of committing more than half their portfolio to fixed income. Stocks, after all, have driven most long-term portfolio growth.
Caleb Silver, editor-in-chief of Investopedia, points out that history shows equities play a leading role in wealth creation, even if future returns fall below past averages.
Vanguard presents the 60/40 allocation as a guide, not a mandate. An investor holding 80% stocks and 20% bonds might consider a gradual shift to 70/30, rather than flipping the formula overnight.
This reassessment reflects the reality that markets are dynamic. With equities priced high, bonds yielding more, and future returns expected to be more modest, Vanguard’s framework helps investors navigate risk without sacrificing growth entirely.
For those with shorter investment horizons or lower risk appetite, adjusting the classic formula offers a more measured and data-informed approach.