Valuations in focus
April 22, 2026
Even with market softness in the first quarter, global equity risk premiums rebounded only slightly from previous lows and remained historically compressed. As a result, our time-varying portfolios favor bonds over equities.
Investors should consider their own risk tolerances, time horizons, and investment objectives when making investment decisions.
At Vanguard, we take a valuation-aware approach to portfolio construction. The unconstrained portfolio is designed to reflect our current assessment of long-term risk-return trade-offs across asset classes. It is intended as a market signal, expressing where we see relative opportunities and risks across equities, fixed income, regions, and investment styles. Given its high active risk, it isn’t intended to suggest a specific investment vehicle. Rather, it helps identify where the opportunity set is evolving and where investors may be better compensated for taking risk.
The constrained portfolio translates our insights into practical, investable solutions. Rather than fully replicating the magnitude of the unconstrained portfolio’s positioning, the constrained portfolio adds measured risk guardrails and practical constraints. This approach ensures portfolios remain relatively aligned with their intended risk profiles, such as an allocation of 60% stocks and 40% bonds, while moving in the same direction as our market views. The result is a disciplined implementation that preserves diversification, maintains a stable risk profile, and reflects how clients invest in practice.
Both portfolios are dynamic; their allocations can change to reflect the Vanguard economic and market outlook. They are built on the Vanguard Asset Allocation Model (VAAM) and informed by forecasts generated by the Vanguard Capital Markets Model® (VCMM). Together, the models provide a clear, directional view of markets grounded in valuations, fundamentals, and long-term megatrends.
Notes: Portfolio allocations for the unconstrained and constrained portfolios were determined by the Vanguard Asset Allocation Model (VAAM). The asset classes under consideration were U.S. and non-U.S. equities and fixed income, as well as sub-asset classes, to illustrate time-varying allocation both across and within asset classes. See the notes that accompany VCMM forecasts for additional details on asset class indexes. A home-bias constraint of 55%–65% was applied for U.S. equities, and 65%–75% was applied for U.S. fixed income. VCMM 10-year projections as of March 31, 2026, were used. The sum of individual sub-asset class allocations may not total 100% because of rounding.
Source: Vanguard calculations, as of March 31, 2026.
Source: Vanguard calculations, as of March 31, 2026.
Source: Vanguard calculations, as of March 31, 2026.
Notes: Vanguard calculations are based on portfolios optimized by the VAAM, using return projections from the VCMM. Sharpe ratio is a measure of return above the risk-free rate that adjusts for volatility. A higher Sharpe ratio indicates a higher expected risk-adjusted return. Expected maximum drawdown is the median peak-to-trough drop in the portfolio’s value in 10,000 VCMM simulations. The probability of underperforming the benchmark is in any given year.
Source: Vanguard calculations, as of March 31, 2026.
IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of March 31, 2026. Results from the model may vary with each use and over time. For more information, please see the Notes section below.
Notes: All investing is subject to risk, including the possible loss of the money you invest.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More importantly, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, U.S. municipal bonds, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over time. Forecasts represent the distribution of geometric returns over different time horizons. Results produced by the tool will vary with each use and over time.