The investment world just threw us a curveball. Vanguard — the indexing behemoth that practically wrote the book on buy-and-hold investing — just suggested we flip the classic 60/40 portfolio on its head. They're now recommending 60% bonds and 40% stocks.
For physicians who've spent years maxing out 401(k)s and back-door Roth conversions, this suggestion hits like a bucket of ice water.
This hot take from Wall Street is the investing equivalent of your medical school professors suddenly saying, maybe we should reconsider washing our hands before surgery.
So what's going on? And more importantly, what should you actually do about it?
Also read: Is Diversification Finally Working Again?
Why Are Bonds Suddenly Looking Better Than Stocks
Kevin Khang, a senior global economist at Vanguard, doesn't claim that stocks are going to tank tomorrow. He's saying that when you look at what stocks cost today versus what bonds are paying, the numbers have shifted dramatically.
Ten-year Treasury bonds are yielding around 4.24% as of late January 2026. That kind of yield would've made retirees weep with joy a decade ago. Meanwhile, stock valuations are sitting at nosebleed levels.
The Shiller PE ratio hit 39.8 as of December 2025, which is 125% above its historic average and places current valuations at approximately the 99th percentile of all historical data since 1881.
The culprit is the same thing that's been dominating every investing conversation for the past two years: artificial intelligence.
Tech companies have been pouring hundreds of billions into AI infrastructure, and investors have been bidding up anything remotely connected to it. Nvidia's market cap has exploded.
Microsoft and Amazon are building data centers like there's no tomorrow. And the whole market's getting dragged along for the ride.
As Khang wrote, “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. Many of these firms have extraordinary earnings power but also historically elevated valuations.”
Does that mean that AI is overhyped? Not really. AI tech is real, and it's here to stay. Khang is implying that we've already seen this playout before. With railroads, electrification, and the internet.
Khang notes that past high-valuation, innovation-driven investment cycles show “a surprisingly consistent pattern: While real technological progress often follows historic investment cycles, long-term returns often fall short of historical averages.”
Vanguard expects U.S. stocks to return just 4% to 5% annually over the next decade (a far cry from the 10–15.8% average annual return over the past ten years). Meanwhile, bonds at current yields offer similar returns with substantially less volatility.
Right now, you're likely in your peak earning years, socking away serious money. Where you put those dollars today determines whether you're working until 65 or hanging up your stethoscope at 55.
In case you missed it: Backdoor Roth vs Taxable Investing for High Earners
Take Notes, Doc
Most physicians have a specific investing profile that makes Vanguard's recommendation particularly relevant.
First, you started late. While your buddies were maxing out 401(k)s in their twenties, you were crushing medical boards takeout.
By the time you finished your fellowship, you were probably 30-something with six figures of student debt. That compressed timeline means you can't afford a lost decade. When someone who started at 22 hits rough years, they shrug.
When you hit them in your forties, it could mean saying goodbye to early retirement.
Second, physicians have higher risk capacity but not necessarily higher risk tolerance. On paper, you can handle volatility with blessings like job security, high income, and marketable skills. In practice?
Many docs check portfolios obsessively during drops and consider bailing at exactly the wrong time. If bonds help you sleep and stay invested through rough patches, that behavioral benefit alone beats chasing an extra percentage point.
Third, your tax situation is unforgiving. In the 35–37% federal bracket plus state taxes, that 4.24% Treasury yield looks more like 6–7% tax-equivalent. Municipal bonds in high-tax states push it even higher.
The AI Bubble: Is This Time Really Different?
Every time markets get expensive, people claim “this time is different.” Usually, they're wrong.
AI looks genuinely transformative, with companies already using it to boost productivity and cut costs. This isn't like the dot-com vaporware. But that doesn't mean today's valuations make sense.
Vanguard's analysis shows a consistent pattern where real technological progress often follows innovation cycles, but returns disappoint because investors paid too much upfront.
Think about buying a practice. You wouldn't pay 40 times annual revenue because someone showed you a cool AI tool. You'd run the numbers and make sure the price made sense relative to actual cash flows.
The same logic applies here. If you're paying 30 times earnings for AI infrastructure bets, you need AI to work better than everyone's already assuming. That's a tall order.
What Vanguard's Actually Saying (And Not Saying)
Before you start panic-selling your index funds, let's be clear about what Vanguard's recommendation actually means.
Khang explicitly says to “take the perspective seriously, but not literally.” He's not suggesting you dump your entire stock portfolio tomorrow and buy bonds. That would be market timing, and Vanguard hates market timing almost as much as they hate high expense ratios.
Roger Aliaga-Diaz, Vanguard's global head of portfolio construction and chief economist for the Americas, called this shift “almost like a tectonic shift” in a December 2025 interview.
According to Vanguard's calculations, the 40/60 portfolio has an expected 10-year annualized return of 5.7% versus 5.3% for the traditional 60/40. More importantly, the bond-heavy allocation comes with expected volatility of just 6.9% compared to 9.3% for the stock-heavy version.
Instead, Khang suggests a directional shift. When you're putting new money to work (that quarterly bonus, those monthly contributions to your 401(k), tilt more heavily toward bonds than you normally would.
As he puts it, “Start with the next dollar. For investors still accumulating assets, this means directing new contributions toward the preferred allocation.”
This is actually pretty smart advice for physicians at different career stages.
If you're early in your career (first few years out of residency, still crushing loans), you might ignore this entirely. You've got 30+ years until retirement. Short-term valuations matter less when dollar-cost averaging over decades.
If you're mid-career (15 years into practice, loans paid, serious assets accumulated), this is where Vanguard's advice makes sense. You've got enough wealth that protecting it matters, but you can't afford to lose half in a bear market and start over.
If you're late in your career (five to ten years from retirement), you should've been tilting conservative anyway. Vanguard's recommendation might just accelerate that process.
The Tax-Advantaged Account Angle
Where you hold these assets matters enormously for physicians.
In your 401(k) or traditional IRA, bonds make perfect sense. That 4.24% yield grows tax-deferred until retirement, when you'll hopefully be in a lower bracket. Stocks generate minimal taxable events in index funds, so they're fine in taxable accounts.
If you're tilting towards bonds, do it primarily in a tax-advantaged space. In taxable accounts, consider municipal bonds or keep more stocks for their qualified dividend treatment.
Exception: no state income tax (Texas, Florida, Washington) shifts the calculus back toward Treasuries in taxable accounts.
What's Your Number?
The aim of Vanguard's recommendation isn't to maximize returns. Instead, it revolves around balancing returns with risk when the risk/reward tradeoff has shifted.
Physicians pursuing financial independence should ask themselves, “How can I reliably get to my number without unnecessary risk?”
If you've got $3 million saved and need $5 million to retire, do you really need 90% stocks? A conservative portfolio compounding at 6% instead of 8% still gets you there. It takes an extra couple of years, but it avoids risking a 40% drawdown right before retirement.
Be real with yourself. Are you investing to win, or investing to not lose? Both strategies are valid, but require different approaches.
“Maybe They're Wrong” – The Devil's Advocate
Vanguard could be wrong. They were bearish for much of the 2010s bull market, and aggressive investors crushed it. Their return projections consistently undershot actual market performance.
Maybe AI really is different. Maybe productivity gains will justify today's valuations. If Vanguard's wrong and stocks rip higher, you still own 40% stocks. You're still participating, just not as much.
If they're right and stocks stagnate while bonds deliver, you've protected yourself.
The Practical Game Plan for Physicians
So what should you actually do?
First, don't do anything rash. If you're 80% stocks and comfortable, there's no reason to shift overnight. That's just market timing with extra steps.
Second, look at your next dollar. When you make your next 401(k) contribution or get your year-end bonus, tilt more conservative. Put 40% toward bond funds instead of your usual 20%.
Third, use rebalancing as an opportunity. If stocks have run up and your portfolio drifted to 70% equities, rebalancing to 60% moves you in Vanguard's direction. Consider going further to 50% or 40%.
Fourth, consider your situation. High-income docs in high-tax states might lean aggressive with munis. Those with pensions might stay aggressive since the pension provides bond-like stability. Those planning to work 20 more years might ignore this entirely.
Fifth, remember that the savings rate matters more than allocation. A physician saving $150k annually will reach FI whether they're 70% or 50% stocks. One saving $30k won't, regardless of allocation.
Vanguard's recommendation to flip the 60/40 portfolio is worth consideration because Vanguard doesn't make bold calls. They're the investing equivalent of the medical consensus — conservative, evidence-based, focused on the long-term.
While the people over at Vanguard are by no means fortune-tellers, their observations make sense. Stocks are expensive, and bonds are paying real yields again. As Aliaga-Diaz explained, “What you have is a compression of the equity premium. It's almost as if the market does not really reward for the extra risk of stocks.”
Only 48% of physicians felt fairly compensated in 2024 (the lowest in a decade), and you're compressing 40 years of wealth building into 20 or 25 years. Getting cute with an overvalued stock market isn't necessary when bonds are throwing off over 4% risk-free.
Source: Medscape
The beauty of Vanguard's approach is that it doesn't box the investor in. You don't need perfect timing. You just need to gradually shift toward assets with better risk-adjusted returns as you deploy new capital.
Will this advice look brilliant in hindsight, or will it be another case of being too conservative during a secular bull market? Who knows.
But here's what I do know: nobody ever went broke taking a guaranteed 4%+ while reducing portfolio volatility. And for physicians trying to reach financial independence without losing sleep over market swings, that might be the smartest move of all.
The traditional 60/40 portfolio made sense when bonds paid nothing, and stocks were reasonably valued. Today's world looks different. Maybe it's time your portfolio did too.
Disclaimer: This article is for informational and educational purposes only and should not be construed as financial, investment, tax, or legal advice. Every physician's financial situation is unique, with different income levels, tax situations, risk tolerances, time horizons, and financial goals. Past performance does not guarantee future results. All investments carry risk, including the possible loss of principal. Stock and bond values fluctuate in response to market conditions, economic factors, and changes in interest rates. The statistics, projections, and third-party commentary cited in this article represent opinions and forecasts as of their publication dates and may have changed. Vanguard's recommendations reflect their views and assumptions, which may or may not prove accurate. Before making any investment decisions, consult with a qualified financial advisor, tax professional, or other appropriate professional who can evaluate your specific circumstances. This article contains links to third-party websites for informational purposes only. Physician on Fire does not endorse or control the content of external sites and is not responsible for their accuracy or availability.
Also read: Pray for Beta, Not Alpha
Frequently Asked Questions
Why is Vanguard recommending a 60/40 bond-heavy portfolio now?
Vanguard believes bond yields have risen enough, and stock valuations have climbed high enough, that bonds offer better risk-adjusted returns than stocks over the next decade.
What returns does Vanguard expect from stocks over the next 10 years?
Vanguard projects U.S. stock returns of roughly 4% to 5% annually, well below historical averages.
Are bonds really safer than stocks right now?
At current yields, high-quality bonds offer predictable income with far less volatility than equities trading at elevated valuations.
Does Vanguard think an AI bubble is forming?
Vanguard does not deny AI's long-term potential but argues investors may be paying too much upfront, compressing future returns.
Should physicians sell stocks and move entirely into bonds?
No. Vanguard suggests gradually tilting new contributions toward bonds rather than making abrupt portfolio shifts.
Who benefits most from a bond-heavy allocation?
Mid-career and late-career physicians with meaningful assets and shorter time horizons stand to benefit the most.
Where should physicians hold bonds for tax efficiency?
Tax-deferred accounts like 401(k)s and traditional IRAs are typically the most efficient place for taxable bond income.
Are municipal bonds better for high-income physicians?
For physicians in high-tax states, municipal bonds can offer higher tax-equivalent yields than Treasuries.
Does savings rate matter more than asset allocation?
Yes. A high savings rate often has a greater impact on reaching financial independence than fine-tuning allocation.
Is Vanguard often wrong on market forecasts?
Vanguard has underestimated stock returns before, particularly during long bull markets, which they openly acknowledge.
Does a 40/60 portfolio mean lower long-term wealth?
Not necessarily. Vanguard estimates slightly higher expected returns with significantly lower volatility compared to a traditional 60/40.
Is the traditional 60/40 portfolio outdated?
It made sense when bonds paid little and stocks were reasonably valued. Today's interest rate and valuation environment has changed the math.
What's the main takeaway for physicians?
You do not need perfect timing. You need disciplined allocation, tax awareness, and a strategy that lets you stay invested without losing sleep.
