Vanguard is leaning away from artificial intelligence stocks and into bonds for 2026. “Flipping the formula” from a 60% stocks/40% fixed income to a 40/60 provides higher risk-adjusted returns over the next decade, said Roger Aliaga-Díaz, Vanguard’s global head of portfolio construction and chief economist, Americas. The model portfolio strategy uses a method called “time-varying asset allocation,” which is based on Vanguard’s 10-year forecasts for returns. “We see U.S. equity returns very subdued, or we expect them to be much [more] subdued than in the previous years,” he said. The average equity return was 15% per year over the last 10 years, but Vanguard is expecting 4.5% to 5% returns over the next decade, he noted. On the fixed-income side, he expects interest rates to remain elevated, with the U.S. 10-year Treasury yield hovering in the 4% to 4.5% range. Higher bond yields can offer some cushion against moderate price increases. “What you have is a compression of the equity premium,” Aliaga-Díaz said. “It’s almost that the market does not really reward for the extra risk of stocks.” The 40/60 has an expected 10-year annualized return of 5.7%, versus 5.3% for the 60/40, according to Vanguard’s calculations. However, the heavier allocation toward fixed income tends to reduce turbulence in the portfolio, resulting in a 10-year expected annualized volatility of 6.9%. That of the 60/40 portfolio sits at 9.3%. While 2025 was a great year for stocks, there was also plenty of volatility, Aliaga-Díaz pointed out. In the U.S., “2026 is looking to be another year where there are many unknowns to be solved from the point of view of policy and geopolitics,” he said. “On top of that, all those shocks … [could happen] on a market that is already overvalued, or at least valuations that are stretched.” Leaning away from AI Within its equity portion of the 40/60 portfolio, Vanguard likes U.S. value and only has a small allocation to growth stocks. While artificial intelligence will still have an impact on the economy, the bar is really high for the stocks to surpass the firm’s performance expectations since valuations are already lofty, Aliaga-Díaz explained. However, AI’s impact could expand beyond the companies that are behind the technology, he added. “We believe that if AI is going to be an actual general purpose technology, that it is going to be adopted and used by other companies — not just by the creators of AI, but by other companies that may use them in their operations, like health-care companies, finance, banks [and] manufacturing — that adoption of the technology would actually favor the other parts of the market,” he said. Aliaga-Díaz said he also likes developed markets, excluding the U.S., because they are also a bit of a value play. Within fixed income, the largest allocation in Vanguard’s 40/60 portfolio is in U.S. aggregate bonds, which is the U.S. investment-grade bond market and includes assets like Treasurys and corporates. However, there is also a substantial allocation to international bonds: 24% of the portfolio is earmarked for that asset class. “We’re expecting a convergence of monetary policies,” Aliaga-Díaz said. “For a while, central banks outside the U.S. have been in easing mode. The Fed was almost more holding the line,” he added. “We may see a couple, one or two, more cuts from the Fed while the central banks outside the U.S. may be not moving much, or even moving the opposite direction. So that basically gives a little bit of an edge at the margin to international bonds.” The use cases for 40/60 and 60/40 Vanguard’s 40/60 focuses on the performance over the next decade, which means it is good for investors focusing on the short-to-medium term, Aliaga-Díaz explained. “Perhaps you’re closer to retirement, or, and you really believe in market views and follow the markets closely, that’s where these portfolios can help,” he said. Those who have longer-term goals, such as retirement or college savings, and are in the earlier years of investing, there is nothing wrong with the 60/40, he said. “These cycles and these corrections in the markets are something that is more short term,” Aliaga-Díaz noted, adding that for those with time horizons beyond 10 years, “probably you’re fine with the traditional 60/40.”
