The AI bubble has a leading investing firm rethinking the 60/40 rule — here’s what you should know to strategize

This isn’t Vanguard declaring the 60/40 rule dead. But rather, it is a signal that the assumptions behind it may no longer be as solid as they once were — and for Canadian investors, it’s worth noting.

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

The benefit of the 60/40 portfolio has always been its balance. Stocks historically deliver higher returns over the long term, but with volatility. Bonds have slower growth, but they provide steady income and a cushion when markets get choppy. Together, they’ve offered a smoother path to building wealth — especially for investors approaching retirement or saving toward a specific goal within the next decade or so.

That balance worked particularly well when bonds reliably delivered positive returns and the stock market was supported by a healthy variety of strong-performing companies across numerous sectors.

But the last 10 to 15 years have been anything but typical. Global stock markets, led by a small group of American mega-cap tech companies — and more recently, the AI boom — have surged.

The S&P/TSX Composite Index delivered an annualized return of roughly 10.3% over the past decade (2). Meanwhile, south of the border, the S&P 500 returned roughly 16% annually over the same period (3). Bonds were squeezed by years of low yields and more recently took a hit from rising interest rates (4).

Now, Vanguard says U.S. stocks are expensive by almost any measure, and the risk is compounded by how heavily concentrated those markets have become in a small number of companies.

“The equity market is overvalued,” Roger Aliaga-Díaz, global head of portfolio construction at Vanguard, told USA Today (5).

At the same time, higher interest rates have made bonds more attractive. They are offering yields that haven’t been seen in over a decade — which means better potential returns going forward. For investors who may need to access their portfolios within the next five to 10 years, Vanguard says shifting toward bonds could lower volatility without giving up much in expected returns.

“Over the next five to 10 years, we think the 40/60 gets the same return as the 60/40,” Aliaga-Díaz said. “But with half the risk.” (6)

What a 40/60 portfolio looks like

Vanguard isn’t suggesting that investors dump their stocks or walk away from diversification. Its proposed 40/60 framework still holds meaningful equity exposure — just less of it.

In a sample allocation outlined by the firm, bonds make up the majority, spread across domestic companies and non-U.S. markets — areas Vanguard believes offer better long-term prospects than current overpriced American growth stocks.

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 (7).

The logic is straightforward: If stock returns over the next decade are lower than in the last 10 years — something many forecasters expect, including both Vanguard and Goldman Sachs — bonds don’t need to outperform stocks to earn a bigger role in your portfolio. They just need to hold steady while cushioning the blow when markets swing (8).

For Canadian investors, Vanguard’s 40/60 framework is particularly relevant for those with shorter timelines: people nearing retirement, those saving for a down payment or anyone who can’t afford a big drawdown at the wrong moment. In this situation, avoiding major losses may matter more than squeezing out every last percentage point of return.