Investing in the stock market carries the possibility of risk (losing some or all of your investment) and reward (earning a return on your investment). In reality, it will probably include a bit of both; some stocks will rise in value or pay a dividend, others, meanwhile, may perform poorly – it’s all part of the investment journey.
But why go through all that heart ache? Why not leave the money in the bank? And why invest in the stock market; why not invest into something else, like gold?
All good questions. Let’s delve into some of those questions a little deeper.
Why not leave money in the bank?
Had this article been aimed at the ordinary citizen, I’d be arguing that inflation will erode away savings. But this is a site aimed at Muslims, which means there’s a double harm: leaving money in the bank may attract interest.
Let us consider inflation a little deeper first. Let’s imagine we inherited the sum of £50,000 and left that in the bank for the next 20 years. Gradually, that sum of money will lose its value over time and in 20 years’ time, it will be worth only £33,342.
In that time, though, we may very well receive a paltry 0.3% or so in interest. That will give us a grand total of £3,000 from interest income over 20 years. Of course, this is money that we cannot keep, so we’ll have to donate it (without the expectation of any reward).
As it turns out, our imaginary £50,000 inheritance will require more of our attention. If we are keeping it in a bank account that means each lunar year it will qualify for zakat. We’ll first have to determine the nisab, deduct that from the principle sum of £50k, and then pay zakat on the remaining qualifying amount to those that qualify for zakat (this time, we can hope for reward, Insha’Allah). We’ll need to do this every year, for the next 20 years. The outcome of this is that after 20 years of paying zakat on our inheritance, the £50k will now only be worth £30,134.
And if we factor in both zakat and inflation, our £50k now turns into £13, 476.
One step better than this is putting it into some sort of savings account in an Islamic bank. The largest Islamic bank in the UK is Al Rayan. Their savings account pay a profit rate of around 0.6%. The ISA savings account has a tax free limit of £20k, which means depositing £20k will earn you around £18 per month. That’s better than nothing, but it is unlikely to make a material difference to your life.
Before moving onto the next section, I feel I need to explain the difference between ‘interest’ a bank pays and ‘profit’ a bank pays. On the face of it, they both appear to be the same: In both scenarios, customers deposit a sum of money into their bank account, and when they go to retrieve it in a month’s time, there’s more money than they had deposited.
But that is far too simplistic an understanding and ignores the small, but important details. To make this point clearer, let us consider the following example. Every Muslim would acknowledge that ‘halal’ beef and ‘haram’ beef is not equal, yet both is from the same animal. If beef is prepared in accordance with shariah laws, then it is considered halal. Haram beef, meanwhile, does not follow shariah rules of preparation. Likewise, there is a difference with banks, too. When it comes to interest from conventional banks, the amount the bank will pay you is fixed. They’ll tell the customers the APR (or the ‘annual percentage rate’ of interest) at the start and the bank will guarantee that amount will be paid every month. There is no risk involved. Customer deposits will also be used to provide loans to borrowers at a much higher APR rate.
Islamic banks work differently. Using the deposits, they will invest that money into halal businesses. From the profits, the bank will take their cut and the customer will get the remaining. In essence, the bank acts as a sort of fund manager for the customer. The profits they give are never guaranteed and there’s always a risk that no profit will be received at all in a given month. Further, customer deposits are not used to provide haram loans.
Irrespective of Islamic or a conventional bank, the arguments above both point to the same thing: leaving money in a bank (without purpose) is not a wise thing to do.
Which asset class is the best investment?
There are many assets an investor could invest in, and many experts suggest having a varied portfolio of assets.
Property As is common knowledge, property is a very safe investment. Price depreciation is rare, and when prices depreciate, it tends to eventually recover in the short to medium term and begin to appreciate again. Long term, prices of property almost always increases. That’s just the capital gain. Then there is the rental income in the interim.
However, property, as an investment, is a totally different investment proposition to gold or stocks. Investors need to decide if they want to be a ‘hands on’ or ‘hands off’ type of investor. Both have their pros and cons. Even for a hands-off investor, there will still be legal considerations (for example, at the point of purchase) and other administrative work (such as HMO paperwork). Then of course there’s the possibility of void periods and repairs and maintenance. This type of investment is more suited to those that want to do it full time or have lots of time on their hands.
The biggest problem with property as an investment, however, is that it can be prohibitively expensive for the ordinary person to become a property investor. This has, sadly, given rise to many Muslim buy-to-let investors taking out haram mortgages to fund their property portfolios.
Gold
As an investment, gold has stood the test of time. One of the main things to note is that profits from gold rely wholly on price appreciation. Unlike property or stocks, there is no income in the interim. On the contrary, gold is a physical asset, which is incredibly precious and valuable. This makes it necessary to arrange specialist storage (and perhaps insurance), which is costly.
An analysis by Investopedia is a good place to start. When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analysed. For example, over a 30-year period, stocks have outperformed gold, but over a 15-year period, gold has outperformed stocks.
From 1990 to 2020, the price of gold increased by around 360%. Over the same period, the Dow Jones Industrial Average (DJIA) gained 991%.
If we look instead over the 15 years from 2005 to 2020, the price of gold has increased by 330%, over the same period, the DJIA increased by only 153%.
So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through to the present day, stocks blow gold away.
Bonds
Bonds are totally haram, so I won’t afford it more than a few of sentences in this article. Bonds are similar to putting your money into a fixed savings account and getting interest, but for an extended amount of time and usually for a higher APR return than a bank would give. Bonds are usually issued by governments or large businesses.
Stocks/ shares
Like gold, it is possible to use historical statistics to assess whether investing in the stock market is a good idea.
Let us stick with our earlier example of £50k inheritance held for 20 years.
According to Wesleyan, a 180 year old British multi-disciplinary financial organisation, an investment of £50k into the stock markets over 20 years would have turned into £132k. This figure assumes the value of your shares rose 5% a year, which is quite a realistic percentage return. Of course, there is no guarantee that stocks will rise by 5% - the value may go down. But if history is anything to go by, it’s more likely stock portfolios will increase, rather than decrease, over time.
For our American readers, I’ve used a US based calculator. According to the calculator provided by JP Morgan Chase, a $50,000 dollar investment held over 20 years between the year 2000 and 2020 would have returned around $241,000. This is substantially more than what the Wesleyan calculator worked out (even factoring in exchange rates). This is because the JP Morgan Chase calculator assumes dividends were paid and those dividends were reinvested. Further, the calculator assumes the average value of a share cost around $73 per share. Given that one share in Amazon can cost north of $3,000, a share price of $73 seems very affordable.
Conclusion Ultimately, the asset class you decide to invest in is a personal choice. But certainly, leaving it to erode in a bank is not a good idea. For me, stocks and shares works the best because they are highly liquid (easy to buy and sell) and accessible (does not require a large loan to get started). With lots of research and effort, I’ve been able to make very good returns on shariah compliant shares on the stock market, Alhamdlillah (I’ve written about this previously on my six month trading review). For wealthy investors, a diversified portfolio makes sense, but for the investor just starting out, stocks and shares seems to be the way forward.
If you are starting out on your trading journy, you may wish to consider my 30 Day Trading Programme, which covers Islamic principles of investing, learning the basics of the stock market and learning how to use a trading platform. The programme is totally flexible and is based on the principles of self-learning.
Further reading:
https://www.investopedia.com/ask/answers/020915/has-gold-been-good-investment-over-long-term.asp
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