By Shafaq Kazi, Investment Advisor Representative at ShariaPortfolio
Article was originally published on LinkedIn and is available here.
Ibn Abbas reported: The Messenger of Allah, peace and blessings be upon him, said, “Take advantage of five before five: your youth before your old age, your health before your illness, your riches before your poverty, your free time before your work, and your lifebefore your death.” Mustadrak of Al-Haakim, Musnad Imam Ahmad.
With this hadith, we are reminded that we must give attention to the blessings we have – youth, health, wealth, free time and life – and utilize them before they vanish. We must not squander our blessings but instead make good use of them now. One way that we at ShariaPortfolio can help is by reflecting on the value of time when it comes to building a life of greater financial security.
Time is incredibly important when it comes to investing. The first rule of successful investing is to start now. The second rule is to stick with it over time. Let’s take a look at these rules and see what they may mean for you.
Start now. The earlier you’re able to start investing, the more money you’ll be able to accumulate for retirement – this is due to the power of compounding.
For example, if you were to contribute $50 per month over a 40-year period, assuming an 8 percent compounded annual return, you’ll have over $156,000 saved. But if you start saving later in life and are only able to contribute $50 per month over a 20-year period, again assuming an 8 percent annual compounded return, you’ll have less than $28,000 saved – a difference of $128,000.
To make up that difference and reach the $156,000 goal over a 20-year period, you’d have to contribute around $285 per month, or $235 more per month than you would have had to save if you just started earlier in life.
Starting early also discourages the habit of extravagance or Israaf. Saving money, rather than spending it, is rarely easy, but it may be easier when the sums required, like $50 a month, are relatively small.
Stick with it. Once you’ve decided to start investing, you will want to find halal options that you can stick with over the long run. Individual self-directed investors can use screening tools to evaluate individual stocks for Sharia compliance, but an easier approach is to use a Sharia-compliant mutual fund or robo-advisor.
Halal mutual funds, such as those offered by ShariaPortfolio, do not invest in companies that derive more than five percent of their cumulative income from non-compliant activities such as gambling, alcohol, tobacco, defense and guns. Other prohibited categories including pork, cinema and broadcasting, and companies that charge interest, including insurance companies and traditional financial services.
These halal mutual funds do the work of identifying compliant investments for you and then monitor your holdings to ensure they stay compliant through mergers, acquisitions and shifts in business strategy. At ShariaPortfolio, we also receive guidance from an Ethical Advisor to monitor compliance.
There is a third important principle for successful investing:
Diversify your portfolio. An all-equities portfolio has the potential to deliver high returns, but there is also greater risk involved with investing solely in stocks. Sharia-compliant funds can diversify their portfolios by investing in Sukuk, Islamic financial certificates which provide an income stream that is a return on capital, not interest on money. Sukuk provide a way to combine the higher returns of a stock portfolio with the reduced volatility of securities.
Working with an advisor, you can choose a balance of equities, sukuk and other alternative options such as commodities and real estate to achieve the mix of growth and safety you desire. Advisors typically suggest that people reduce the share of equities and increase less volatile in-come-producing investments as they near retirement. This way they are better positioned to ride out any sharp downturn in the market, as happened with the global financial crisis in 2009.
The best allocation of assets also depends on a person’s finances. Someone with a secure inheritance may have a different tolerance for risk from a person with a house to pay off and a child in college. A Financial Advisor can help you sort through the best choices for your situation.
ShariaPortfolio offers portfolios ranging from aggressive to moderate to a conservative income-oriented fund, and different ways to invest, from working with a personal Financial Advisor to using a low-cost robo-advisor. You can also start with the digital experience and then, as your portfolio grows and your financial life becomes more complicated, you can shift to a personal advisor.
Halal investing doesn’t have to be complicated. The right funds, and advisors when you want them, can smooth your way to a growing and Sharia-compliant portfolio. Just remember to make sure to utilize the blessing of time you have been given.
If you want to learn more about Halal Investing please feel free to reach out to myself or ShariaPortfolio’s other advisors.