Chasing performance and the fear of missing out can be psychological barriers to keeping a balanced and diversified portfolio. But investors must accept a universal truth: There will always be an asset class, sector, or security that will outperform your portfolio. Two simple thought experiments illustrate the folly of chasing outperformance at the cost of diversification.

News of an open-source artificial-intelligence model that could potentially rival current models at significantly lower cost caused tech shares to tumble recently, as investors began to question the value of the industry’s more established players. We asked Vanguard Global Chief Economist Joe Davis for his perspective on current market valuations and what the future might hold, especially given his team’s ongoing research on “megatrends” and its views of AI’s potential to fundamentally change the economy.

Vanguard’s Global Chief Economist Joe Davis discusses a shift in the fixed income market as artificial intelligence (AI) progresses and highlights the potential for active risk-taking in a higher interest rate environment over the next decade. This Q&A is one in a series featuring Davis’s research on megatrends and the future impact that AI can have on the U.S. economy and investors at large. For more insights, visit our Megatrends hub.

The choice between different index-weighting approaches can have an important portfolio impact in terms of sector and factor exposures.