Islamic Finance Blog & Articles
Stocks have been on a rollercoaster ride in recent months, with the world amid a pandemic. In a matter of weeks to months, the stock market moved from all-time highs to all-time lows. If you have invested your money, you've probably considered whether or not you should withdraw it. And if you haven't started investing yet, you're undoubtedly wondering if now is the right time.
We are sometimes filled with fear of the what-ifs, which leads to inaction. We are unable to execute an investment because we are either afraid of losing money or believe that we can purchase it at a lower price and gain a better upside. To accomplish the long-term financial outcomes required to secure your financial future, we must overcome these concerns. In this article, we will be answering the most common questions about financial planning and investment.
Why is the market so volatile?
The volatility of the stock market is a measure of how the market's overall value fluctuates up and down. The market fluctuates 5 to 10 percent month to month for decades at a time. The stock market's historical upward trend is matched only by its historic volatility. With significant levels of volatility, the stock market exited 2020 and started in 2021. It's due to a high level of uncertainty about the future of various industries and the global economy.
Volatility in the stock market has some advantages. Short-term investors who supply liquidity but do not make long-term investments are shaken by volatility. It hardens long-term investors and benefits them over time (because a successful return on investment is determined by the time rather than timing). Furthermore, a dynamic market prevents investors from becoming complacent. It's also frequently an indication of a company's value that more truly reflects its true value rather than being artificially inflated by investor enthusiasm.
The future is uncertain, and even a minor shift in the economy could have far-reaching implications. It's easy to lose sight of the larger picture and allow your emotions to get the best of you when financial markets are unpredictable. Although this is understandable, it is more vital to concentrate on your long-term objectives rather than attempting to determine the right or wrong time to invest. Nobody knows whether a market downturn is on the corner. However, markets have a history of recovering over time.
Why timing the market does not work?
Empirical facts and factual basis have taught us all some vital lessons, most notably that time in markets is more important than timing the market. Having and keeping to a financial strategy that is appropriate for you and your goals, even and especially during times of uncertainty and volatility. It pays to be completely invested in the markets and to stay invested in the markets, particularly if you expect to earn additional money in the future.
It's appealing to imagine that you can invest in stocks without experiencing years of losses. The stock market's high expected returns are due to the risk it entails. The larger returns come as a result of taking on more risk. It's known as the risk premium, and it explains why stocks outperform government bonds in terms of returns. Market timing means that you can get the benefits of stock investment without taking on the risk sounds too good to be true.
What is "Timing the Market"?
Market timing is the act of using predictive methods to move money into or out of a financial market or to convert funds between asset classes. If traders can forecast when the market will rise and fall, they can place trades to profit from the market movement.
What is the alternative?
If you invest persistently, you will profit in the long run. That's because one thing is certain: the market will continue to rise. In reality, if you stopped investing during a downturn, you'd suffer financially because those downturns are brief in comparison to the market's whole history.
Is time or timing more important in investing?
In reality, timing the market has caused more investors to lose money than those who succeed. The real kicker is that you don't have to be an expert market timer to make a good profit. History has shown that the amount of time spent in the market is significantly more crucial.
Enduring the ups and downs
The stock market has grown substantially throughout history. That isn't to say that there haven't been devastating recessions and downturns. These occurrences can have a huge impact on investors' daily life, to the point that there can be no way out. Being a long-term investor necessitates having the courage to ride out these swings, particularly the lows, which can put your faith in the market to the test.
Compound interest refers to the process of earning interest on the money you've already gained in the past. It's a powerful force that can dramatically increase the return on an investor's investment. The ability of an asset to generate returns is then reinvested to create more earnings is referred to as compounding.
Assume you make a $10,000 investment in a unit trust funds which gives 10% dividend. Your initial investment has grown to $11,000. You keep the investment because of its great result. The value of the fund increases by 10% in the second year. As a result, your $11,000 becomes $12,100. Rather than appreciating by $1,000 (10%) as they did the first year, your shares increased by $1,100 since the $1,000 you got the first year grew by 10% as well. Compounding is the process that generates earnings from prior earnings.
How long is long enough?
Four to five months' worth of living expenses that you'll save aside for a rainy day. After you've done that, you may start thinking about your financial objectives. Are you putting money down for savings? When would you wish to stop working? Are you saving for a property? In how many years do you want to make that purchase? As you can see, your investment strategy will differ depending on your specific objectives. A more cautious approach may make the most sense if the financial milestone is short- or mid-term. You'll take on less risk and have a less possible reward, but you'll get closer to your goal in the time frame.
When isn't a good time to invest?
Even if you have a basic understanding of how investing functions and are eager to invest large sums of money, you should proceed with caution. If you haven't set up a budget, built up an emergency fund, or paid off your debts, you might want to put off investing for the time being. If you haven't yet defined the financial milestones for which you plan to invest, you might wish to wait.
Investing can have an overall impact on your financial wellness, but you might not be ready yet. However, if you are eager in investing your money then you might want to consult a financial consultant. It's essential to get the advice of a financial advisor before making a life-changing decision. A financial adviser may assist you in analyzing your decision, recognizing the implications for other aspects of your life, and weighing your options. They help you create a good financial plan and helps you in decision-making.