You may not have heard of this investment strategy, but it is not new. In fact, it is one that many financial advisors have told their customers to consider when investing. This is a straightforward and classic investment strategy. We’ll explain the 60-40 strategy in simple terms, helping you understand how it works and why it might be a good option for young investors.
What is the 60-40 Investment strategy?
The 60-40 investment strategy is a basic yet effective way to allocate your money between 2 primary asset classes: bonds and stocks.
60% of your investment goes toward stocks, and the remaining 40% goes toward halal bonds.
Stocks are ownership shares of companies, representing a share of their profits and potential growth. On the other hand, a halal bond (aka sukuk) is an Islamic financial certificate aiming to create returns similar to conventional fixed-income instruments like bonds.
For bonds, we recommend reading this blog post to get a better understanding of bonds and Islamic bond options.
Why is the 60-40 strategy so popular?
- Risk Management: by dividing your investment between stocks and bonds, you can reduce the impact of market fluctuations. When stock prices go down, the stability of bonds can help cushion the blow, thus balancing out your overall portfolio.
- Steady growth: stocks historically tend to outperform compared to halal bonds. But, bonds are more stable so, so if there is a fluctuation in the market, you have a chance of having steady growth.
- Diversification: diversifying your investments across different asset classes is a crucial concept in finance. The 60-40 strategy provides diversification by combining 2 distinct asset classes with varying risk levels.
How to implement the 60-40 strategy?
- Look at your goals: before investing, understand your financial goals and time horizon. Investing is a long-term endeavor, so align your strategy with your goals.
- Choose investments: research the company and look into its financial statements if they are public.
- Monitor and rebalance: over time the market will change and fluctuate. These changes can impact your portfolio and when you may reach your goals.
The 60-40 investment strategy offers a simple approach to building a balanced and diversified portfolio for those who do not want to deal with a lot of stress and headaches. Remember, investments always have a risk. But by starting early and remaining disciplined your chances of achieving your financial goals can increase.