Navigating stock market turbulence in the face of the Trump tariffs.
In This Article
- Quick Summary (tl;dr)
- Action Items
- Financial Bungee Jumping
- Risk as a Muslim
- Risk is a Roller Coaster
- Risk is Personal
- Risk is Inevitable
- Mapping the Hazards
- Concentration Risk: What You Put Your Money In
- Concentration Risk: Don’t Put All of Your Eggs in the USA
- Timing Risk: When You Need Your Money Back
- Patience and Trust
- Related Articles
Quick Summary (tl;dr)
Market swings feel chaotic, but understanding risk is key to long-term investing success. This guide explains why volatility is necessary (even if uncomfortable!), how Muslims are encouraged to take on prudent risk-sharing, and how to navigate the inevitable turbulence.
Action Items
- Stay the Course. Avoid panic selling during downturns; reacting emotionally often locks in losses.
- Diversify Widely. Spread investments across companies and countries; don't put all your eggs in the US market alone.
- Invest Patient Capital. Investing is just saving for the long-term (5+ years); protect your short-term needs with cash reserves.
Combine these with patience (sabr) and trust (tawakkul), and carry on.
Financial Bungee Jumping
My phone would regularly buzz me awake at 3 AM. These weren't emergency calls or alarms for tahajjud.
They were price alerts - tripwires I’d set on the highly volatile cryptocurrencies I was trading.
My brief, intense foray into the world of crypto trading years ago was a harsh introduction into the raw, emotional reality of market volatility.
This week, headlines blazed when the global stock market made swung 10% in both directions in the face of Trump’s tariffs.
These are seismic short-term shifts in traditional financial markets.
But for a one-time crypto trader who regularly navigated 20% daily swings, that kind of market action can feel like a Tuesday.
I no longer trade crypto. I came to understand that while some volatility is inherent and necessary for investment growth (as we'll explore), the hyper-speculative, often untethered turbulence of trading (and certainly trading crypto assets) wasn’t smart investing. But those sleepless nights and screen-glued days permanently recalibrated my perception of risk in markets.
When you’ve spent some time doing the financial equivalent of bungee jumping, the normal bumps of a long road trip often feel surprisingly manageable.
This recent turbulence we've seen in global stock markets is a reminder that understanding volatility is crucial for any investor. It's precisely this turbulence – the gut-wrenching swings, the headlines screaming 'CRASH!', the sheer feeling of uncertainty – that understandably keeps many people sidelined, their hard-earned money parked "safely" in cash. It feels chaotic, unpredictable, and dangerous. There's an undeniable emotional cost to watching your savings fluctuate.
Risk as a Muslim
How, then, do we approach this uncertainty from a place of faith? We are reminded of the wisdom in the Prophet Muhammad's ﷺ instruction to first 'tie your camel,' taking all reasonable and permissible precautions, and then 'rely upon Allah' (Tirmidhi).
In the context of investing, actively understanding the nature of market risk and taking prudent steps to manage it is an essential act of 'tying the camel.' It’s the necessary preparation we take. And ultimately, we place our trust in Allah for the outcomes.
From an Islamic perspective, legitimate profit often arises from shared risk. We aren't meant to seek guaranteed, risk-free returns on capital alone, as that often drifts into the territory of riba.
Investing in businesses via the stock market is fundamentally about sharing in their potential successes and their inevitable struggles and uncertainties. The turbulence, in many ways, is the terrain of legitimate risk-sharing.
Understanding this is the first step. But how do we practically navigate this terrain?
This is a short field guide on navigating turbulent investment terrain. We need clear thinking and practical strategies to navigate market swings as inherent features of the risk-sharing journey.
Risk is a Roller Coaster
When people think about risk, what they’re often thinking about is volatility - the up-and-down movement of prices. When the magnitude of those price swings becomes larger or more frequent than usual, we hear about it in the headlines.
Investment marketing materials, like prospectuses for mutual funds, ETFs, robo advisor apps, often show smooth, upward-sloping charts. It's important to understand what these represent: they typically illustrate long-term average performance, smoothing out the significant day-to-day or month-to-month bumps to show a historical trend or potential future trajectory. Zoom in on an actual investment statement, however, and the journey looks less like a gentle upward slope and more like a jagged mountain range.
This is where emotions run highest. Seeing your hard-earned $50,000 portfolio drop to $45,000 (a 10% drop) can feel deeply unsettling. A drop to $40,000 (20%) can feel catastrophic and trigger panic.
Risk is Personal
Risk – especially the experience of volatility – is personal.
Two people can hold the exact same investment and see the exact same 10% drop on their statements, yet experience it very differently emotionally. One might shrug it off, remembering their long-term goals, while the other might feel intense anxiety.
This difference relates to what behavioural finance calls "behavioral risk tolerance" – our individual psychological wiring, past experiences, and current financial stability heavily influence how we feel about potential losses.
Yusuf was 33 in early 2022. He diligently invested his way to $100,000 for a house down payment, aiming to buy in mid-2024. He had invested in a broad, Shari’ah-compliant stock market fund, HLAL.
Then came the 2022 bear market; by October 2022, major stock indices were down roughly 20-25%. Yusuf saw his $100,000 shrink towards $80,000. With his house purchase looming less than a year away, fear gripped him – what if it fell further? He panicked and sold everything near the market lows, locking in a substantial loss.
But what if Yusuf had stayed in the market? By Yusuf's target purchase date in mid-2023, the stock market had staged a significant recovery. Had he simply held his investment, that $80,000 might have recovered to around $95,000 or even back near his original $100,000.
Instead, his panic sell crystallized the loss.
Your feelings of fear or panic during a downturn are real and valid. But the thoughts driving those emotions – "This is going to zero!", "I need to sell everything now before it gets worse!" – might not accurately reflect the long-term reality or represent the wisest course of action, especially for a diversified, long-term investor. This is where adopting clear thinking, grounded in principles and a solid plan, becomes crucial to counter potentially destructive emotional reactions.
Risk is Inevitable
If you hold wealth, you are taking on risk. There is no opt-out.
Staying "safe" by holding cash isn't truly risk-free. You are accepting inflation risk. Cash sits on a slow, downward slope, as inflation silently erodes its purchasing power year after year. That slope isn't perfectly smooth either; periods of higher inflation mean steeper, faster losses in value. And this loss compounds – the longer you hold cash, the more purchasing power you lose.
If you choose to turn your cash into an asset by buying something (stocks, real estate, etc.), you’ve traded the near-certainty of inflation risk for investment risk. The good news is that historically, owning productive assets has offered an upward-trending path over the long term. But the cost of taking that upward path is turbulence.
Mapping the Hazards
So, if risk is inevitable when seeking growth, how do we understand and manage the specific types of risk we encounter?
Concentration Risk: What You Put Your Money In
Concentration Risk is the specific risk tied to what you invest in. What if the particular company you choose fundamentally falters or fails completely? What if no one wants to buy the plot of real estate you hold? The worst-case scenario here is your investment goes to zero. And the fewer assets you have, the more exposed you are to that risk. If you have all of your money in one company, or in one piece of land, or in one digital asset, you’ve exposed yourself to the unique, or idiosyncratic risks, of that asset.
But concentration risk changes dramatically when you diversify. Instead of risking your capital on the success of one company, diversification means spreading that risk across many companies.
You effectively trade company-specific risk (formally known as Unsystematic Risk) for the broader risk of an entire sector, market, or even the global economy (formally known as Systematic Risk). While the overall market will still have ups and downs (turbulence remains!), the risk of your entire diversified portfolio going to zero becomes vanishingly small.
This power to dramatically reduce your exposure to catastrophic failure—the specific, avoidable risk tied to single investments—without necessarily lowering your expected long-term return is precisely why diversification is famously called the only 'free lunch' in investing.
Amina was 28 during COVID and got caught up in the excitement around pandemic-era technology stocks, she invested $15,000 – a large part of her savings – into Zoom Video Communications (ZM) stock near its peak price.
Zoom was widely used and often considered Sharia-compliant, making it seem like a solid investment.
But as the world reopened and growth slowed dramatically, Zoom's stock price reversed course. By late 2022, the stock had crashed over 85% from its peak. Amina's $15,000 investment was worth only a fraction of its original value at $3000.
Had Amina invested that same $15,000 in early 2021 into a broadly diversified Sharia-compliant global equity ETF (like HLAL or SPUS) instead, her experience would have been starkly different.
While the overall market certainly had ups and downs, including the 2022 downturn, such a diversified fund did not collapse by 85%+. By late 2022, her $15,000 might have been worth $14,000. Still a little underwater, but much better than the losses she was looking at with her investment in Zoom.
Amina faced the consequence of Participation Risk concentrated in a single, popular stock; diversification wouldn't eliminate market volatility, but it provides powerful protection against the catastrophic decline of one specific company, even one that seemed unstoppable.
Concentration Risk: Don’t Put All of Your Eggs in the USA
Amina's story illustrates how diversification protects against concentration risk at the company level. Investing in a broad Shariah-compliant US market halal ETF like HLAL or SPUS instead of a single stock like Zoom dramatically reduced her exposure to the catastrophic failure of one specific business. This is a crucial first step.
But even holding a diversified fund like HLAL or SPUS means concentrating your investment risk in a single country – the United States. While the US market is large and diverse across industries, relying solely on it carries its own form of concentration risk: Geographic Concentration Risk.
Think about the recent headlines and political uncertainty coming out of the US. Whether it's unpredictable policy shifts, intense debates about the economy's future direction, or questions about long-term stability, this kind of country-specific noise is a reminder that tying your entire investment future to the fate of just one nation carries inherent risks.
When a single country faces significant internal turbulence or uncertainty, investments heavily concentrated there are naturally more exposed. This underscores why diversifying globally is such a crucial step in managing concentration risk.
Just as diversifying across many companies reduces the impact of one company failing, diversifying across countries helps mitigate the risks tied to any single nation's unique political or economic challenges, while also providing exposure to different growth opportunities around the world.
To achieve this global diversification, Muslim Canadian investors can consider several ETF options that focus on markets outside the US, or that blend US and international exposure. Here's a comparison of three prominent examples:
Ticker | SPWO | UMMA | WSHR.TO |
Name | SP Funds S&P World ex-US ETF | Wahed Dow Jones Islamic World ETF | Wealthsimple Shariah World Equity Index ETF |
Top 5 Countries | Taiwan (18%)
Japan (10%)
China (10%)
Switzerland (9%)
UK (7%) | Switzerland (14%)
Japan (12%)
Taiwan (11%)
France (10%)
UK (10%) | USA (46%)
UK (8%)
Switzerland (7%)
Other (38% combined) |
Timing Risk: When You Need Your Money Back
Timing Risk (formally known as Sequence of Returns Risk) is more subtle than participation risk, but potentially just as damaging. This type of risk isn't simply about the market going up and down; it's about when those fluctuations happen relative to when you need to withdraw your money.
Experiencing poor returns early in your investing journey (when your portfolio is relatively small) is mathematically less damaging than experiencing those same poor returns right before or during retirement when you start taking significant money out. Two investors can achieve the exact same average annual return over, say, 30 years, but end up with vastly different amounts of wealth if one experiences a major market downturn just as they begin making withdrawals, while the other benefits from strong returns during that crucial initial withdrawal period. The sequence matters immensely.
At age 65, Omar was set to retire on January 1st, 2023, with a $2,000,000 portfolio. His plan was to live off the standard 4% withdrawal rate, equating to $80,000 per year.
But, the challenging market conditions throughout 2022 caused his balanced portfolio to decline by roughly 15% by year-end. His $2M nest egg had shrunk to $1.7M just as he needed to start taking income.
Now, his planned $80,000 withdrawal represented a higher 4.7% of his portfolio, significantly increasing the risk of running out of money later in retirement – the classic sequence risk scenario.
If, as part of his pre-retirement planning during 2021 or early 2022, Omar had strategically shifted 2 years' worth of planned expenses ($160,000) into a cash buffer, his situation would be far less precarious.
His remaining $1.84M portfolio would still have dropped ~15% to roughly $1.56M, but he would have the $160k in cash untouched.
He could then comfortably fund his living expenses for 2023 and 2024 entirely from this cash buffer, giving his investment portfolio crucial time to potentially recover during the market rebound of 2023 without being depleted by withdrawals near the bottom.
By insulating his immediate income needs from market volatility with a cash buffer, Omar could have dramatically reduced the threat of Timing Risk impacting his long-term financial security.
This brings us to a common piece of advice you'll often hear: "Only invest what you're willing to lose." Frankly, that's often ridiculous advice. It implies that investing – the serious business of allocating capital towards productive assets for long-term growth – is the same as rank speculation, or worse, gambling at a casino. Who’s "willing to lose" their retirement savings?
Instead, I propose a different (if wordier) razor for genuine investing: "Only invest what you’re reasonably sure you won't need to touch for 5+ years."
This time-horizon focus is the most practical defense against Timing Risk. It acknowledges that market downturns happen, but over longer periods (5, 10, 20+ years), markets historically recover and trend upwards. Giving your investments time is crucial.
This principle directly leads to a vital planning step: You must separate your long-term investment capital from the money you need for shorter-term goals and security. This is why, elsewhere, I emphasize setting up both an Emergency Fund (for unplanned costs) and perhaps even an "Icing Fund" (for planned, shorter-term goals or opportunities) separately from long-term saving (i.e. investment) accounts.
The cash set aside specifically to protect your investment plan from forced withdrawals is often called a Liquidity Buffer. It provides the funds for unexpected emergencies or planned short-term expenses without requiring you to sell your long-term investments, especially during market dips when prices are low. Selling investments shortly after purchasing them due to unforeseen cash needs, or worse, being forced to sell during a downturn to cover expenses, can severely damage your long-term returns and derail your entire plan.
For general financial security during your working years, a common guideline for your baseline Emergency Fund is holding 3-6 months of essential living expenses in easily accessible cash. As a practical rule of thumb, saving 1-3 months of your gross salary often achieves a similar target, since essential expenses frequently average around 50% of income for many households. This baseline protects against job loss or unexpected major bills.
But the strategy evolves as you approach a major goal or enter retirement, when Timing Risk becomes the primary concern. At this stage, strategically holding a larger liquidity buffer – of 1-2 years' worth of your planned withdrawals in cash.. This larger buffer allows you to ride out market volatility without being forced to sell your core investments at potentially the worst time.
Patience and Trust
Market turbulence feels like chaos, but it's the terrain of legitimate risk-sharing, the price for potential growth beyond inflation's slow erosion. Recognizing Concentration Risk drives us to diversify – the closest thing to a free lunch.
Understanding Timing Risk demands we invest for the long haul (5+ years) and protect ourselves with adequate cash reserves.
But beyond mechanics, the journey requires a mindset grounded in
sabr—patience through the cycles—and tawakkul—reliance on Allah after diligently preparing. Build your plan, understand the risks, and then trust the process.
True resilience isn't avoiding storms, but navigating them with clarity, discipline, and faith.
Related Articles
/w=1920,quality=90,fit=scale-down)
/w=1920,quality=90,fit=scale-down)
Written by Farooq Maseehuddin
Farooq Maseehuddin (MuslimMoney Guy) is a financial educator and writer. He holds both a Bachelor of Education (BEd.) and a Master of Education (MEd.) from the University of Alberta. He's been a high school teacher and Muslim community organizer for two decades.