On Monday 13th June, the S&P 500 ended 3.9 percent lower, nearly 22 percent from its high in January, officially entering the U.S. into a bear market. Over three weeks ago, stocks took a dive, closing in on a bear market. A last-minute turnaround of the market pulled stocks back up, narrowly avoiding what has now become inevitable.
If one is actively picking stocks, my view is to:
If one is a buy and hold investor, then yeah continue the monthly drip feed.
But make sure the asset allocation is sensible, i.e. for now, avoid bonds which Iāve been saying for a while. This is because if interest rates go higher than everyone expects, bonds will continue to get whacked. Just hold whatever you would put into bonds, into cash instead.
Now, what should we do if our complaint stocks turn non-compliant due to the drop in their market caps, causing the percentages to exceed 30%?
Umar
āFor now avoid bondsā
Only for now?
Arenāt bonds haram?
Assalaamu Alykum Asad! Welcome to the Zoya Community. Great to have you here 
This is a great question that weāve had people as in the past as well. Hereās my answer and the thread where weāve discussed it. Hopefully, youāll find it beneficial.
As for what to do when a stockās compliance changes Iāll start with the caveat that Iām neither a sheikh and Zoya is not giving advice regarding what to do with your own investments. I would start by saying that itās important to consider why is the company no longer shariah compliant. For example if a company now has non compliant shariah revenue as a part of their business going forward, itās probably better to stay away. If a companies compliance is changing because of their financial ratios, I feel itās better to take a long term view of whether the company is taking on debt to deal with a short emergency (during the pandemic for examples) or if this is a part of their new company structure. Allah knows best, but this is the approach Iām taking now until I learn more.
Since you implement AAIOFI standards, whatās AAIOFIās ruling in this case?
Sorryā¦maybe I wasnāt clear.
I meant Halal Bonds, aka Sukuk.
Please assume everything I say and do re: Islamic investing assumes the halal option.
Itās not clear to me how much sukuk are affected by interest rates. Itās something I asked the Amana fund manager. I was told for AMAPX they are investing in mostly dollar denominated funds in Gulf countries that are oil rich, and better positioned against inflation because obviously oil is going up with inflation. But that doesnāt answer or clarify what to expect in terms of sukuk prices. Clearly there is more going on besides interest rates that moves prices, because they spiked down with stocks then recovered quickly after the initial Covid market panic.
I had sold some sukuk earlier to rebalance and buy more stock as the market fell, since Iām a long term buy and hold investor. I still hold some, but not anything I anticipate needing in the next couple years. Clearly cash has been better for the short term. But for Muslims thereās a bigger penalty holding cash because we donāt benefit from interest on those savings. So itās a matter of how long will it be before itās sold and how much yield it generated until then.
My advice for long term investors is hang in there, and learn from your current discomfort if you have it. Resist the temptation to bail out now. If you canāt, sell an amount to keep a bigger cash percentage, but you will now have to stick to it to be disciplined. So when stocks recover, you better sell to keep that percentage not buy back at a higher price, and only buy more it goes down more. Sticking to a percentage over a long term is the fool proof way of buying lower and selling higher.
One can compare AMAPX performance with bonds performance and youāll see itās true.
Yes itās true there is more to bond performance than purely interest rates movements.
But itās also true that there is a correlation between interest rate direction and bond performance.
So if interest rates go higher than expectedā¦bonds go down.
Which is a large reason why bonds are down this year.
My guess is that you make minimal income with sukuk.
My guess is that there might be say 2% income, but the fee for holding it is 1%, so you might make say 1% income per year. So not a big decision driver.
60:40 stocks:bonds buy and hold investing uses historical data to come to the 60:40 ratio.
Which historical data?
Data since the 1980s when interest rates were 20%
And what happened to interest rates since then?
They declined.
Federal Funds Rate - 62 Year Historical Chart | MacroTrends
So, because interest rates declined, bonds have done well since the 1980s.
Are interest rates likely to decline in the future, given they are very low?
No.
Soā¦is the 60:40 still valid then?
So Umar, points 2 3 and 5 are fair. I canāt say 1 is entirely wrong but there are fundamental differences of being debt vs equity based. Unless you dug into the mechanics of it and can show why and how they should exhibit the same interest rate correlation, you canāt assume it is based on short term correlation with bond prices. All the history we have is for low or falling rates.
Yields are including and after expense ratios. For institutional class thatās around 2 percent. Not significant except if held long term.
Iām not assuming there is a correlation. Iāve checked it out looking at the data.
Sukuk performance correlates to US bonds historically. Look at Oasis Sukuk as wellā¦there is more history there.
Feel free to have a look and check yourself.
From a mechanics perspective, I have a basic knowledge which may be wrong. But I think it works like thisā¦
Someone builds a motorway in Pakistan for $1bn.
Pak govt pay 2% per year for 20 years, then they pay $1bn at the end to buy the asset.
Thatās how I imagine it works. I may be wrong but there you go. Main thing is the data correlation
I hadnāt seen Oasis, but I looked it up and see itās in the UK (Iām in the US). Oasis Crescent Global Income Fund Class F (GBP) Shares (Acc) Price and Performance | GB00BLD0R132 | Fidelity
It looks like it performed decently over 10 years. But to go by more relevant history we would need something that existed starting way back in the late 70s where inflation spiked, which AFAIK doesnāt exist (please send a link if you came across something).
I can understand why folks would bail out of them or not invest in them given their poor recent performance. Without understanding the mechanics myself, I canāt be sure what to expect over the next few months and years. My hope is they do better than traditional bonds in a rising rate environment.
Final comment from me: if someone is holding a stocks/sukuk allocation per the standard 60:40 or whatever variation thereof**, then bear in mind that all the data that they use to come up with that allocation is based on interest rates declining from 20% to 0%. Which obviously isnāt going to happen in the future.
** e.g. 80:20 stocks:sukuk because I want to be more āaggressiveā, as Wahed may explain it in their model portfolios or whatever they are called.
Comment on the articleā¦the problem with the ādiversificationā will smooth out your returns logic is thatā¦while this worked in the pastā¦this hasnāt actually worked this year.
Everything was down, across stocks, bonds, gold, i.e. the correlation went to 1.
Since the fed interest rates are what determines a bear market and a bull market, we should look into the following:
CPI Data: Occurs monthly, and the schedule is here: Schedule of Releases for the Consumer Price Index
If the reports show that there is high inflation, we could anticipate that the fed (U.S Central Bank) will raise ratesā¦ and if there is deflation, then we could anticipate an interest rate cut which signals a āfed pivotā
FOMC meeting: schedule is here: The Fed - Meeting calendars and information
This is the main meeting that determines markets! This meeting decides whether there will be a rate hike or rate pause, or rate decrease.
Be very cognisant of the inflation data because that will essentially determine whether we will continue to be in a bear market or a bull market.
Check out the inflation reports and CPI data that occurs, they get released by the bureau of labour and statistics every month.