Grow your wealth in a halal way
There are many options when it comes to investing money. You can buy real estate (rental properties), invest in the stock market, bitcoin and other cryptocurrencies, and the list goes on. In this post, I will be focusing on the stock market, since it is one of the best ways to grow your wealth.
Reposted with permission from the author's blog
A lot of people are used to saving money and leaving it in the bank as cash. The problem with that is that every year that it is sitting in the bank, it loses its purchasing power. For example, the things you could buy with $100 in 1980 would cost $338 to buy today because of inflation. Aside from inflation, Muslims are also required to give 2.5% of the value of their liquid assets (cash, stocks, etc.) every year to people in need (zakat). So leaving cash in the bank long term is not a good idea. This is where investing to grow your money comes into the picture.
There are many options when it comes to investing money. You can buy real estate (rental properties), invest in the stock market, bitcoin and other cryptocurrencies, and the list goes on. In this post, I will be focusing on the stock market, since it is one of the best ways to grow your wealth.¹ Historically, given any 30 year period in the history of the US stock market, the market has grown 10% a year on average. In order to understand what that means, if you start today with $0 and invest $500 every month, in 30 years, you will have $1,000,0000.
You can become a millionaire!
$500 invested every month for 30 years will make you a millionaire!
As you can see from the graph above, at the end of the 30 years, the total amount of money you will have invested is $181,000 but with the power of compounding, that money will have grown to $1,000,000! You can change the numbers on this compounding calculator to see how fast you can reach your target number (set “Compounding Frequency” to “Annual” and “Interest Rate” to 10%). What you will discover by trying out different numbers in the calculator is that the longer your investment period is, the more compounding will work in your favor. This is why it’s important to start investing as early as possible so time can work in your favor. However, it’s never too late to start.
What to invest in?
Even within the stock market, you have the option of buying individual company stocks (e.g. Apple), mutual funds (e.g. Amana), and index funds (e.g. Wahed Invest). I believe low cost index funds are the best long term investments (see footnote ¹ if you are not convinced). S&P 500 is a popular index whose price tracks the performance of the largest 500 companies in the US stock market. Index funds track the stock market as a whole and the 10% return mentioned above is for the overall stock market (index). If you invest in individual stocks, you don’t have that peace of mind that long term your money will keep growing.
Shariah Compliant Index Funds
Historically, for Muslim investors who wanted to invest in a Shariah compliant fund (e.g. excluding pornography, alcohol, gambling, military weapons, etc.), the only option was Amana Mutual Funds. Mutual funds are managed by a fund manager who selects 20–30 companies that the manager believes will perform better than the overall market (e.g. S&P 500). Mutual funds are actively managed (i.e. the manager can remove and add companies from the fund) and have a high management fee (over 1%). Amana’s popular mutual fund AMAGX has done well historically but has a management fee of 0.95%. That means that every year, the fund takes 0.95% of the overall account balance. More than 80% of mutual funds underperform the overall market index long term.
Recently, lower cost shariah compliant index funds have come out, such as Wahed Invest’s HLAL , which has a management fee of 0.49%. HLAL is based on S&P 500, removing any non-Shariah compliant companies. It tracks over 230 companies and more or less follows the overall stock market returns.
How to invest?
If you’ve read this far and are convinced in investing in the long term in low cost index funds, you might be wondering how do you actually start investing. The easiest way is to set aside a certain amount from your monthly paycheck and consistently keep investing. You can open up an individual brokerage account at Fidelity.com which lets you buy and sell stocks and index funds. Every paycheck, you can set up an automatic transfer from your bank account to the brokerage account and keep investing in a low cost index fund. I personally invest in HLAL. For the simplicity of this post, I will not go into the different retirement accounts or more advanced investment topics. I will write other posts to cover them.
¹ I highly recommend reading the free stock series to learn more about why the stock market and low cost index funds is one of the best long term investments. It is also available as a book (it’s an excellent read.)
Note: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Make sure to do your own research and consult a licensed professional for investment advice.
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