Why Vanguard says investors should flip the traditional 60/40 portfolio in favor of bonds

• Vanguard suggests a 60% bond, 40% stock portfolio, flipping the traditional allocation.
• High AI-driven stock valuations prompt Vanguard's bond-focused strategy.
• The firm's Kevin Khang said a gradual shift is better than a sudden flip of the stock/bond allocation.

If you're looking to put some money to work in markets right now, Vanguard says it's a good idea to lean into bonds.

In fact, the asset management giant says the ideal portfolio at the moment is 60% bonds and 40% stocks, flipping the traditional advice for asset allocation.

Of course, the ideal portfolio is different for each investor based on risk tolerance and timeline. But given where bond yields and stock valauations sit, bonds look like the more attractive of the two asset classes right now, says Kevin Khang, a senior global economist at Vanguard.

"Take the perspective seriously, but not literally," Khang said in commentary published on January 22. "Our strategic allocation of 40% stocks and 60% bonds reflects our own assumptions about investment horizons, long-term capital market return projections, and risk tolerance."

Khang's lackluster view on stocks stems from the AI boom seen over the last few years. While he still thinks stocks can outperform in the year ahead, high valuations driven by endless AI enthusiasm are likely to dampen long-term returns, as has historically been the case.

"Today's US equity market is led by a narrow group of mega‑cap technology companies and other rising stars spending hundreds of billions of dollars on AI infrastructure," Khang said. "Many of these firms have extraordinary earnings power but also historically elevated valuations. Past high‑valuation, innovation-driven investment cycles offer a surprisingly consistent pattern: While real technological progress often follows historic investment cycles, long-term returns often fall short of historical averages."

Vanguard's upward-adjusted fair value levels show today's stock valuations rival those seen in 2021.

Meanwhile, 10-year Treasury yields sit at around 4.22% — offering robust income and plenty of cushion for appreciation if investors were to seek safety in bonds amid a stock-market pullback.

Despite laying out his flipped 60/40 vision, Khang emphasized that his commentary shouldn't be taken as a recommendation to adopt such a portfolio construction immediately. Instead, one can start moving in such a direction as they put new money to work.

"Instead of treating the recommendation as a binary 'switch,' we suggest thinking in terms of direction and pacing," Khang said. "Start with the next dollar. For investors still accumulating assets, this means directing new contributions toward the preferred allocation."