ZK Portfolio - Updated October 15, 2019

STOCK MARKET INVESTING

 

Please note that the information provided below is based on personal experience and may not be reflective of your own experience. The author and the company not responsible for any decisions you make based on the information provided. Please consult a professional before investing.

 

Watching the stock markets rise and fall, you can imagine why a total beginner might be frozen with fear. The DOW 30 index, which is composes of the largest and best companies in the world, falling thousand points in couple of days! Booms and busts! Well, first of all, let’s put that volatility into some much-needed perspective. Yes, 2008 and 2009 were seriously frightening years for stock investors. A decline in the Dow Jones average from above 14,000 down to 6,626 was hair-raising. But now in 2019, we’re back above 25,000 now, i.e., 10 years later. So to speak stock market investing can be risky but if you have a long term view, the risk is minimal.

 

One technique I have learnt over 20 years is to determine which stocks to hold when the market gets risky. The question is look for signs when the market is risky. We shall talk about how to look for signs of risk later and what type of stocks to invest in and how to determine if a stock is worth it. www.Muslims-Businesses.com investing pages gives some ideas of the stocks that are worth pursuing. Always check us out for regular updates to our portfolio.

Although I have 20 years of experience in the stock market, I can tell you investing in the stock market can be challenging and many a time too confusing unless you understand all the dynamics involved. With the markets connected globally, events happening in one country could affect the stock market in all countries. Events like the technology shares crash in 2000, the crash in Sept 2001, the crash in 2008/2009 etc. affected economies and stock market almost everywhere around the world. There are several lessons I have learned over the years that I would love to pass onto our Muslim brothers and sisters who can benefit from my experience.

 

Before you want to consider investing in the stock market, here are some golden rules to consider:

 

  1. Never use borrowed money to invest in the stock market. You could end up with a serious debt and make your situation worse than it is today.

  2. Never use margin accounts as margin accounts allow you to borrow money up to twice as much extra, but a downturn in the markets could wipe off all your money.

  3. Only 10-20% of your investments should be in the stock market. The rest should be real estate as number one and other investments like gold and income and dividend based mutual funds.

  4. There are times when the stock market gets very risky and in those times it is better to sell 50% of stocks and have cash in hand and other 50% invested in defensive stocks like gold (GLD), gold companies (GDX), health care (MRK, PFE, LLY, etc) and consumer staples (KO, K, GIS).. One of the best ways to assess rick is to look at the VIX chart shown below. Stocks are safer when the VIX is below 20. When VIX is above 20, sell 50% of your stocks and and be 50% in defensive stocks. As you can see from the charts below, end of 2008 was the worst time for stocks as the VIX was above 70.

  5. Only invest in stocks that are companies that you know and their products are known hopefully worldwide. These are much less risky. For example, Warren Buffet made billions in investing in well-known companies like GE and Gillette. GE is no longer the great company it used to be anymore. In today’s world, these companies seem very unexciting but that’s where Buffet made his billions. In comparison, in today’s world, well-known companies are Apple, Google, Caterpillar, Starbucks, Boeing, Home-Depot, etc. The important thing is to be able to differentiate between these well-known companies and choose the right ones. Mostly it about current growth and future growth potential, so growth in Earning per Share is very important. However the economic cycles can really change the future growth potential and hence lower the stock price considerably as well. For example, the housing crisis created an economic crisis in 2008 and virtually all stocks were affected, even the best of them. So one golden rule is to raise cash and have only 50% invested in bad market and have 50% defensive stocks as discussed above. These stocks usually pay a good dividend of 2%-4%. Start invest more when the economy starts to improve. Watch the VIX chart as it will reflect the health of the stock market. Watch for employment/unemployment numbers although it is a lagging indicator and definitely watch the GDP numbers.

  6. Never invest in stocks less than $10/share as these companies are usually poor and selling for this price as the smart investors usually do not want to invest in these companies. In fact the best companies are the ones that usually have the highest share prices example Apple went to over $200/share, Google to over $1000/share and Amazon to over $2000/share.

  7. Try sticking to investing in DOW 30 or S&P 500 stocks as these companies are fairly large and usually span multiple countries and many a time multiple continents.

  8. Always have a diversified portfolio from different sectors, for example do not buy tech companies only ... have a mix of tech companies, health care, telecoms, industrials, retails, etc.

  9. Keep an eye on US Industrial Production. For example you will see from the chart below that US Industrial Production turned negative first and then the stock market crash followed. This also correlates with US ISM Purchasing Managers Index also shown below that went well below 50 indicating industrial contraction.

  10. Also the US Non-Farm payroll became negative in 2009. Also shown in chart.

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