Here's why an investment giant wants to turn the 60/40 rule on its ear

Core Viewpoint - Vanguard suggests a shift from the traditional 60-40 investment strategy to a 40-60 strategy, advocating for a higher allocation in bonds due to concerns about stock market overvaluation and anticipated lower returns in the coming decade [1][10]. Group 1: Investment Strategy - The traditional 60-40 rule allocates 60% to stocks and 40% to bonds, aiming for a balance of risk and reward [1]. - The proposed 40-60 rule suggests a shift to 40% in stocks and 60% in bonds, which Vanguard believes could yield similar returns with less volatility [11][12]. - Vanguard's analysis indicates that U.S. stocks are currently overpriced, with a CAPE ratio of 40.40, comparable only to the dot-com bubble peak [7][10]. Group 2: Market Performance - The S&P 500 has experienced a significant rise of 216% over the last decade, averaging about 12% annually [2]. - In contrast, the Vanguard Total Bond Market Index Fund has shown a five-year average return of -0.5%, indicating poor performance in the bond market [3]. - Vanguard forecasts annual returns for U.S. stocks to be between 3.5% and 5.5% over the next decade, while projecting bond returns of 3.8% to 4.8% [10][11]. Group 3: Asset Allocation - The recommended 40-60 portfolio includes 36% U.S. bonds, 24% international bonds, 15% U.S. value stocks, 14% international stocks, 6% U.S. growth stocks, and 5% U.S. small-cap stocks [12]. - Vanguard expects value stocks to rise by 5.8% to 7.8% annually and small-cap stocks to increase by 5.1% to 7.1% over the next decade [12][13]. - Foreign stocks are anticipated to outperform domestic stocks, with expected returns of 4.9% to 6.9% [13].