The looming AI bubble pop has one investment giant suggesting clients reverse a longstanding rule. Why you may want to modify your strategy

It’s not a declaration that the 60/40 rule is dead. But it is a signal that the assumptions behind it may no longer be as sturdy as they once were.

Why the 60/40 rule worked — and why it’s being questioned now

The appeal of the 60/40 portfolio has always been balance. Stocks historically deliver higher returns over the long term, but with sharp ups and downs. Bonds tend to grow more slowly, but they provide income and a cushion against volatility. Together, they can help provide a smooth ride to greater wealth, especially for investors nearing retirement or saving for goals within the next decade.

That framework worked particularly well in a world where bonds reliably delivered positive returns and the stock market had a broad variety of well performing companies across different industries.

But the last 10 to 15 years have been anything but typical. U.S. stocks, led by a small group of mega-cap tech companies – and in recent years, the advance of AI – have surged. The S&P 500 provided an annualized return of nearly 16% over the past decade (2). Bonds, meanwhile, struggled through years of low yields and recent losses tied to rising interest rates.

But by Vanguard’s analysis, U.S. stocks are now expensive relative to historical norms, and their value is unusually concentrated in a handful of companies.

“By almost any measure you can look at, the equity market is overvalued,” Roger Aliaga-Díaz, global head of portfolio construction at Vanguard, told USA Today (3).

At the same time, higher interest rates mean bonds now offer more attractive yields – and potentially better returns going forward – than they did for much of the past decade. For investors who may need to tap their portfolios in the next five to 10 years, Vanguard says shifting toward bonds could reduce volatility without meaningfully sacrificing expected returns.

What a 40/60 portfolio looks like

Vanguard isn’t suggesting that everyone dump stocks or abandon diversification. Its proposed 40/60 framework still holds meaningful equity exposure, just less of it.

In a sample allocation outlined in a December report from the firm, bonds make up the majority, split between U.S. and international markets. The stock portion leans toward value stocks, small-cap companies, and non-U.S. equities, areas Vanguard believes offer better long-term prospects than currently overpriced U.S. growth stocks (4).

The logic is straightforward. If stock returns are lower over the next decade than they were over the last one – something many forecasters expect, including Vanguard and Goldman Sachs — bonds don’t need to outperform stocks to play a bigger role in portfolios. They just need to hold their own while dampening the impact of swings in a chaotic market (5).

That makes the approach most relevant for investors with shorter time horizons: people close to retirement, those planning to fund college expenses, or anyone who can’t afford a major drawdown at the wrong moment. For them, avoiding large losses may matter more than chasing every last percentage point of return.