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An expensive stock market is a reason to review your plan, not by itself a reason to abandon stocks or move everything into bonds. The right mix depends on when you need the money, how much loss your finances can absorb, and whether you can stay invested through a decline. Use valuation data as context; set a target allocation around your own goal and risk profile, diversify within stocks and bonds, and rebalance by a rule rather than trying to predict the next market move.
What high stock valuations tell you—and what they do not
The Federal Reserve Board’s May 2026 Financial Stability Report said equity valuations remained high. Its forward price-to-earnings measure was well above its historical median, and its crude equity-premium measure was near an overall low level. The valuation chart’s latest observation was April 2026. The forward P/E measure compares equity prices with expected earnings over the next 12 months; the equity-premium measure is a crude estimate of the additional return investors require for holding stocks rather than risk-free bonds.
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That is a dated description of valuation, not an October 2026 market reading and not a prediction that stocks will fall soon. A valuation measure can describe how expensive stocks appear relative to earnings or bonds without identifying when, or whether, prices will decline. High valuations can persist, and they do not tell an individual investor whether to sell, how much to sell, or what to buy instead.
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Choose an allocation from the goal outward
The SEC’s Investor.gov guide to asset allocation, diversification, and rebalancing says an appropriate allocation depends largely on time horizon and ability to tolerate risk. There is no universal stock/bond percentage that fits everyone. The same portfolio can be reasonable for one person and unsuitable for another because their goals, cash needs, resources, and reactions to losses differ.
Start with the date and purpose of the money
Write down the goal the portfolio is meant to fund and the approximate date you expect to use the money. A distant goal may allow more time to ride out market volatility. Money needed soon has less time to recover if its value falls just before a withdrawal, so a short horizon generally makes losses harder to absorb. This does not produce a precise allocation by itself; it helps identify how much fluctuation is practical.
Separate money for near-term spending from investments intended for later. If an upcoming expense is fixed and cannot be delayed, consider whether you have enough accessible cash or other low-volatility resources to meet it without selling investments after a market decline. A cash reserve is not the same thing as a bond allocation: cash can support liquidity needs, while bonds have their own price, interest-rate, credit, and inflation risks.
Distinguish capacity from willingness to take risk
Risk has two relevant sides. Capacity is the financial ability to absorb a loss without derailing essential spending or the goal. Willingness is the ability to remain invested when the portfolio falls, rather than panic-selling. The SEC describes risk tolerance as the ability and willingness to lose some or all of principal in exchange for potentially higher returns.
These can point in different directions. Someone with a long horizon may have time to recover from a decline but still find large losses intolerable. Another investor may feel comfortable with volatility but need the money soon, leaving little financial capacity for a setback. A sound allocation has to account for both, not just the answer to “How long until retirement?” or a general feeling about risk.
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Turn the answers into a target
Decide on a stock/bond mix that fits the goal, time horizon, loss capacity, and willingness to bear volatility. Treat that mix as a policy target, not a forecast of which asset will do best. If your circumstances change—such as the goal moving closer, spending needs rising, or your ability to bear losses shrinking—revisit the target deliberately rather than reacting automatically to market headlines.
There is no allocation percentage in the Federal Reserve’s valuation report or SEC guidance that can serve as a universal answer. A hypothetical 60/40 portfolio, for example, would mean 60% stocks and 40% bonds, but that label alone says nothing about whether it is suitable, how diversified either side is, or how much interest-rate and credit risk the bonds contain. It should not be treated as a recommendation simply because it is familiar.
What stocks and bonds contribute to a portfolio
Stocks generally offer greater potential for growth and greater short-term volatility. Bonds are generally less volatile and offer more modest returns, but the label “bond” does not mean a holding is risk-free or guaranteed to rise when stocks fall. The two asset classes can behave differently, which is one reason to hold a mix; their risks are not interchangeable, and neither a mix nor diversification prevents losses.
| Choice | Potential role | Important trade-off |
|---|---|---|
| Stocks | Growth potential over time | Greater short-term volatility can produce substantial declines in value. |
| Bonds | Generally lower volatility and more modest returns than stocks | Prices can fall as rates rise; credit quality, maturity, inflation, and liquidity matter. |
| Cash for near-term needs | Accessible funds for planned spending or a reserve | Cash is not a substitute for a diversified long-term allocation and may not preserve purchasing power against inflation. |
The table describes broad characteristics, not a promise about what any asset will do during a particular market decline. Bonds may lose value at the same time stocks are falling, depending on the conditions affecting them. The useful question is not whether bonds always protect a portfolio, but which risks a particular bond holding adds or reduces and whether that fits the job you expect it to do.
Understand the risks on the bond side
Choosing bonds by yield alone can lead to a poor match. A higher yield may reflect greater default risk rather than a bargain. The SEC’s bond-investing guidance emphasizes that credit quality and maturity matter, and that fixed-rate bond prices can decline when market interest rates rise. A bond fund or other pooled holding also deserves a look-through: its name does not tell you all of its holdings, maturity exposure, or credit risk.
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Interest-rate risk: maturity and duration
When market interest rates rise, the price of an existing fixed-rate bond can fall because newer bonds may offer higher rates. Maturity and duration help describe exposure to changing rates: generally, longer maturity or higher duration means more sensitivity to rate movements. A longer-term bond may offer a different yield profile from a shorter-term one, but it can also expose the investor to more price movement as rates change.
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Before buying a bond or fund, check the stated maturity information and, for a fund, its duration and portfolio holdings. Do not infer that a fund’s price will remain stable because it invests in bonds, or that its duration is the same as a guarantee about when you can recover your investment. A bond fund can continue to hold and trade bonds as its portfolio changes; an individual bond’s terms and the fund’s changing holdings are not the same thing.
Credit risk: who owes the money
Bond categories do not carry equal default risk. U.S. Treasury, municipal, investment-grade corporate, and high-yield bonds differ in who issues them and the associated credit risk. In general, an issuer’s ability to make required payments is central to assessing credit quality. High-yield bonds offer higher stated yields in part because investors face greater credit risk; the additional yield is not free return.
Review the issuer or the fund’s credit-quality breakdown rather than relying on a headline yield. A fund concentrated in lower-quality debt can have very different risks from one holding higher-quality bonds, even if both are described simply as “bond funds.” The appropriate choice depends on the role you want the holding to play and your ability to withstand losses.
Inflation, liquidity, and fees
Inflation erodes what a fixed amount of money can buy over time. A bond’s stated payments do not automatically keep pace with rising prices, so a portfolio relying on bonds for a long-term goal still has to consider purchasing-power risk. Liquidity also matters: understand how readily you can sell the investment and whether the market or fund structure could make access less convenient in stressed conditions.
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Diversify both sides of the allocation
Diversification works across and within asset classes. Holding stocks and bonds is one layer; spreading stock exposure rather than relying on a narrow segment is another. On the bond side, consider the mix of issuers, credit quality, and maturities rather than assuming all bonds behave alike. A single pooled fund can still be concentrated if it focuses narrowly, so inspect what it actually owns.
Diversification is not a guarantee against loss. It reduces dependence on the outcome of one holding or one narrow market segment, but holdings can decline together. The aim is to avoid making the whole plan hinge on one company, sector, issuer, maturity range, or market view. Diversifying the portfolio also makes it easier to maintain an allocation as individual parts perform differently.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Should you change a 60/40 allocation when stocks are expensive?
Do not change a 60/40 allocation simply because a valuation measure is elevated. First check whether the target still matches your goal, timeline, and current capacity and willingness to take risk. Then check what “60/40” actually contains: the stock side might be concentrated, the bond side might have substantial duration or credit exposure, and the portfolio might not have enough accessible money for near-term spending.
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When comparing alternatives, look at the same set of questions for each: How soon is the goal? What loss could the household absorb? Would the investor stay invested through a severe decline? What are the bond holdings’ duration and credit quality? Is the portfolio diversified, reasonably liquid for its purpose, and affordable to maintain? These questions are more useful than choosing a percentage based on a market headline.
Set a rebalancing rule before the portfolio drifts
Market movements change weights. If stocks rise faster than bonds, stocks become a larger share of the portfolio than the target; if they fall, the stock share may shrink. Rebalancing brings the mix back toward the chosen target. It is a rules-based response to drift, not a prediction that the asset class that performed best will reverse or that the laggard is about to recover.
Choose a review method
Two common approaches are a periodic review and a preset drift threshold. With a periodic rule, you check the portfolio on a chosen schedule and rebalance if the allocation has moved far enough to matter. With a threshold rule, you rebalance when an asset class moves beyond a specified distance from its target. The threshold and review schedule should be chosen in advance; neither method has a universally correct setting.
Keep the procedure simple enough to follow. Record the target allocation, how often you will review it, and the conditions that trigger a trade. If the portfolio remains within the range you set, you can leave it alone rather than making frequent adjustments based on every market move. If it crosses the threshold, rebalance toward the target rather than changing the target to chase recent returns.
Account for taxes and transaction costs
Rebalancing may involve selling an investment, which can create tax consequences in a taxable account, as well as transaction costs. The effect depends on the account and the transactions involved; do not assume that a trade is costless or that a tax result is the same for every investor. Review the relevant account rules and consider whether you can move the mix using contributions, withdrawals, or trades in a way that fits your circumstances. Where the tax or account implications are complex, seek qualified tax or investment advice before acting.
A practical sequence for reviewing your portfolio
- Name the goal and date. Specify what the money is intended to fund and when it is likely to be needed. Separate near-term spending from longer-term investment goals.
- Assess loss capacity and tolerance. Consider whether a decline would threaten the goal or essential spending, and whether you could stay invested through one without selling in panic.
- Write down a target mix. Choose a stock/bond allocation consistent with those constraints. Do not treat a valuation measure or a familiar model portfolio as a personal recommendation.
- Inspect diversification. Check what each fund or holding actually owns. Look for narrow concentrations and assess diversification both across and within asset classes.
- Review bond risks. Check maturity or duration, credit quality, issuer exposure, fees, and liquidity. Compare risk as well as yield; a larger yield may come with greater credit risk.
- Set a rebalancing rule. Choose a periodic review, a preset drift threshold, or a clearly defined combination. Include the possible tax and transaction costs in your decision to trade.
- Revisit when life changes. Review the target if the goal, timeline, cash needs, finances, or ability to tolerate losses changes. Do not confuse this planned review with a forecast based on high valuations.
When personalized help may be useful
General allocation guidance cannot account for every household’s taxes, account types, income needs, other assets, debts, or legal obligations. If several goals compete for the same money, a near-term withdrawal could threaten your plan, or the tax consequences of changing the portfolio are unclear, an appropriately qualified financial professional can help assess those details. Ask how the professional is compensated, what services are included, and whether the advice is tailored to your full financial situation.
For a free starting point on the basic concepts, Investor.gov publishes the SEC’s guide to asset allocation, diversification, and rebalancing. Use educational material to understand the choices, not as a substitute for advice based on your individual circumstances.
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