At IFG we regularly extol the virtues of not keeping your investments in cash and diversifying your portfolio.
In this article, we want to show you the results of following those two approaches graphically.
The 3 Figures below show the differences that diversification and investing wisely make to a £50,000 pot of cash over a 20-year period.
Person A: Didn’t invest anything
Person A decided to hold their entire investment pot in cash.
Figure 1 illustrates the tragic story of this Person A. Choosing to save this sum rather than invest it, person A sees their initial sum erode to £13,476 in 2020, a 73.048% decrease over the 20-year period. This occurs as a result of two factors:
- Yearly Zakat payments on savings
Paying an annual 2.5% of savings in zakat, alongside an RPI (Inflation rate), which has hovered around 1-7% in the UK since 2000 means that money which is held in cash and not invested will be losing value by at least 3.5% per year.
Person B: Diversified Portfolio
Contrast this with Person B (Figure 2) who decides against holding their £50,000 in cash. Instead, in the year 2000 they hold £15,000 out of the £50,000 in cash and invest the remainder in the following portfolio:
- £12,500 in Gold
- £10,000 in REIT (Real Estate Investment Trust)
- £2,500 in Amazon shares
- £10,000 in GKP shares (Gulf Keystone Petroleum Limited)
20 years later, what could have eroded to £13,476 has grown to a value of £244,151 in 2020, as shown in Figure 3.
The first important point to note from Figure 2 is the diversification of the investments made by Person B.
While the GKP share value fell over the 20 years and the value of REIT remained stagnant, the value of shares in Amazon and the value of Gold both rose significantly after 2008.
Because of the volatile nature of investments, some will fail (GKP), but others will sky-rocket (Amazon & Gold); the key to a profitable outcome is to diversify your portfolio so you don’t feel the loss of one too badly, but also have enough exposure to the high-growth companies so your portfolio has a strong growth element to it too (and doesn’t just stay stagnant).
Get rich quick is a mirage
The second important point to drive home is that as an investor, you should not be aiming for a get-rich-quick scheme.
For person B, the value of Gold only begins to see significant growth in 2008, with Amazon shares taking an additional 6 years (2014) to really skyrocket.
So in this case it took about a decade for things to get going.
The lesson is clear, profound, and one that we bang on about ’til we are blue in the face at IFG: on your way to great profits, never aim for a get-rich-quick scheme. Get rich slow.
Having savings lying around – either under the pillow or in bank deposits – may be a greater losing strategy than many of us thought and it is imperative that we start making diversified investments.
One way to go about doing this is by investing in stocks and shares in public markets as shown in Figure 2, as well as in commodities such as gold.
Another way to go about it is to invest in high-growth companies.
Here are ways you can gain exposure to each of these:
|Asset class||Company||Find out more|
|Stocks||Wahed, various funds, DIY investing||Halal Stock Investing Guide 101|
|Gold||BullionVault, Minted, various ETFs||How to Invest in Gold as a Muslim|
|High growth companies||IFG.VC, Godwin, Intro Crowd, high growth equities etc||High Risk High Reward Investments – How to do them right|
With thanks to Sultan Karim ACA for the analysis. Sultan is the founder of eFinanceConsultant.com, which provides remote consultancy support for CFO’s, Start-ups and Private Equity funds.