Portfolio allocation (no bonds allowed), please suggest

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ObliviousInvestor
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Post by ObliviousInvestor »

Would fixed annuities be permitted? Their payouts aren't exactly the same as interest.

...and if not, perhaps some low-cost variable annuity could be used as a risk-reduction measure in some way?
Mike Piper | Roth is a name, not an acronym. If you type ROTH, you're just yelling about retirement accounts.
sommerfeld
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Post by sommerfeld »

masteraleph wrote:Regardless, there seems to be significantly less legal finagling in Islam regarding loans at interest and investments in Islam than there has been in Judaism, making it significantly harder for Muslims to invest.
With all due respect, there are finaglers in all cultures.

From reading the wikipedia article on Islamic Banking (http://en.wikipedia.org/wiki/Islamic_banking) it seems there are all sorts of ways to structure deals and securities to be "compliant" with the rules as interpreted by your choice of authority figure, and considerable argument about what the rules actually are.

(I'm afraid this doesn't actually help the original poster; there doesn't seem to be a Vanguard of islamic finance. Perhaps this is itself a market opportunity?)
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bottlecap
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Post by bottlecap »

Houston101 wrote:You can estimate how much of your S&P500 earnings and/or dividends are from financial institutions and just donate that much away. It is not going to be exact but it will be close.
Could you buy individual bonds (maybe treasuries), donate the interest to charity and, should the bonds appreciate because of interest rate changes, cash in on the capital gain? Otherwise, hold them to maturity.

Good luck,

JT
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tetractys
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Post by tetractys »

I believe Bridgeway has balanced funds that use options instead of bonds. -- Tet
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Post by stlutz »

Since you can't use bonds to reduce volatility and risk, you should try to do this with the equity portion of your portfolio. I would look for funds that have lower volatility or Morningstar risk scores than the various total market index funds have. A good example might be Vanguard's Equity Income Fund.
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Post by kyounge1956 »

ResNullius wrote:Sorry, but I think it's a huge mistake to mix religion with investing. One requires common sense, while the other requires.... Sorry, but that's how I feel about this.
Think about what you just said. What do you propose as an alternative to mixing investing and religion—that people with religious convictions should set them aside whenever we are dealing with the financial side of life? I'd be real surprised if there aren't many other bogleheads who are wondering how to, or actively working on, bringing their investments in line with their faith. I could say more, but I'm afraid I'd get the thread locked if I did, and I don't want that to happen.
Last edited by kyounge1956 on Tue Aug 03, 2010 12:10 am, edited 1 time in total.
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Re: Portfolio allocation (no bonds allowed), please suggest

Post by kyounge1956 »

Valuethinker wrote:
Houston101 wrote:(snip)Due to religious reasons I cannot invest in bonds (interest is not allowed), but I still want a diversified portfolio.(snip)

Please help.
(snip) In your shoes, I would probably:

- only have the cash equivalent to the emergency fund needs (is there such a thing as a no interest account in the USA?) (snip)
Well, there's an ordinary bank checking account (though it would be unusual to have one's whole emergency fund in a checking account) or you could keep cash in a safety deposit box instead. Either way, it would avoid violation of the prohibition on interest, and it's safer than keeping large sums of money around the house. I think I'd prefer keeping it in the checking account as I do not think FDIC insurance covers cash in a safety deposit box. I'm not certain, but I don't think ordinary homeowner's insurance does either.
Last edited by kyounge1956 on Tue Aug 03, 2010 12:19 am, edited 1 time in total.
kyounge1956
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Post by kyounge1956 »

bottlecap wrote:
Houston101 wrote:You can estimate how much of your S&P500 earnings and/or dividends are from financial institutions and just donate that much away. It is not going to be exact but it will be close.
Could you buy individual bonds (maybe treasuries), donate the interest to charity and, should the bonds appreciate because of interest rate changes, cash in on the capital gain? Otherwise, hold them to maturity.

Good luck,

JT
Along the same line of thought, if you bought individual TIPs and donated the interest to charities, would keeping the inflation adjustment violate the prohibition? If that is permissible, you could at least prevent your cash resources from shrinking over time as a result of inflation.
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Eric
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preferred stock

Post by Eric »

Houston, would preferred stock be an acceptable alternative? iShares has a preferred stock ETF. I don't know much about it, so please do your due diligence.

I think preferred stock is disfavored on this forum because the credit quality is generally lower than on bonds, and many Bogleheads prefer to keep their fixed-income investments "safe." However, the greater risk might be exactly what you need to satisfy your religious criteria. Also, preferred stock may be disfavored on this forum because it offers certain tax advantages to corporate investors (so corporations may bid the price higher than you as an individual would like). But anything you buy in lieu of bonds is going to be an imperfect substitute, and require you to incur additional expense or additional risk or both.
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Re: Portfolio allocation (no bonds allowed), please suggest

Post by Valuethinker »

Houston101 wrote:
Valuethinker wrote:- only have the cash equivalent to the emergency fund needs (is there such a thing as a no interest account in the USA?)
Thanks Valuethinker, I can always use a checking account (pays no interest) and occasionally I have put money in savings accounts also where I donated the interest income at the end of the year.
if you have debts it is worth remembering that repaying a debt = fixed interest investment. So from an asset allocation point of view repaying debt would be the same principle (there are sharia compliant mortgages, at least here).

There are sharia compliant banking funds, at least here in the UK, eg HSBC offers one, I think. Maybe they do in the US, too?

My main criticism of your portfolio was that it had too much Gold. If Gold is a good investment, then why were we not buying it at $350? Even if it doubles from here, the easy money has been made (4 times from the bottom).

Inherently, gold does not have a return, it's just a metal with a storage cost.

If you were investing directly in real estate, that's not a bad bet, as something different from equity. However it's really a business decision: you cannot as a landlord be 'hands off'--there are always business issues, repairs, tenant hassles etc.

Residential housing in Houston is probably not a bad bet (given Houston never had the bubble) but it's a business decision, not an investment/ portfolio decision, and it's hard work being a small landlord (big landlords can pay enough money to hire managers). There are legal liabilities etc.

It's not a portfolio decision because it is not remotely diversified.

I realize the Texas economy is in good shape. I am coloured by the fact that I remember the early 80s when everyone flocked to buy houses in Houston (or Calgary) with the oil boom: those houses were not, in 1995, worth more than they were worth in 1980-- and there was a heck of a lot of inflation in the interim). I doubt Calgary houses (adjusted for inflation) passed their 1980 peak until around 2004 or so. 24 years with no real return, plus all the maintenance bills.

These were people here, in the East (Toronto and eastern US) running to buy houses in Houston. With oil at $40/bl (that would be about $130 now) how could you lose? We were predicting worldwide oil shortages forever.

I realize the Houston economy is now far more diversified, the outlook for oil and gas is far far better etc. There is renewable energy where Houston is a centre, etc.

But I keep coming back to that property crash in my mind-- where house prices went down, down down and then basically did nothing for maybe 15 years (Enron hurt a lot, too, in 2000).
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Re: preferred stock

Post by Valuethinker »

Eric wrote:Houston, would preferred stock be an acceptable alternative? iShares has a preferred stock ETF. I don't know much about it, so please do your due diligence.

I think preferred stock is disfavored on this forum because the credit quality is generally lower than on bonds, and many Bogleheads prefer to keep their fixed-income investments "safe." However, the greater risk might be exactly what you need to satisfy your religious criteria. Also, preferred stock may be disfavored on this forum because it offers certain tax advantages to corporate investors (so corporations may bid the price higher than you as an individual would like). But anything you buy in lieu of bonds is going to be an imperfect substitute, and require you to incur additional expense or additional risk or both.
Now that's creative!

Smart. Obvious but smart.


Since preference shares are not lending (never repaid) and are classified as a form of equity in accounting, they may well be Sharia-compliant (I'm no expert).
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Re: Portfolio allocation (no bonds allowed), please suggest

Post by Valuethinker »

kyounge1956 wrote:
Valuethinker wrote:
Houston101 wrote:(snip)Due to religious reasons I cannot invest in bonds (interest is not allowed), but I still want a diversified portfolio.(snip)

Please help.
(snip) In your shoes, I would probably:

- only have the cash equivalent to the emergency fund needs (is there such a thing as a no interest account in the USA?) (snip)
Well, there's an ordinary bank checking account (though it would be unusual to have one's whole emergency fund in a checking account) or you could keep cash in a safety deposit box instead. Either way, it would avoid violation of the prohibition on interest, and it's safer than keeping large sums of money around the house. I think I'd prefer keeping it in the checking account as I do not think FDIC insurance covers cash in a safety deposit box. I'm not certain, but I don't think ordinary homeowner's insurance does either.
There is safety deposit box insurance but I doubt it would cover large amounts of cash (fraud would be too easy).

FDIC most assuredly does not, AFAIK.

Homeowners insurance usually has exclusions on large amounts of cash.

But there's another reason. If you have large amounts of cash at home, you are a target for burglars. You'd be amazed how many cleaners, safe installers, nannies etc. have dodgy friends or boyfriends.

And if it gets out what you have in the safety deposit box then they do a 'Friends of Eddie Coyle' aka home invasion. Drive to your house, take your family hostage, you take them to the bank and open the safety deposit box. See the film of that name for example (it's a great movie anyways-- one of Robert Mitchum's great moments).

The bottom line is don't keep large amounts of cash.

If we get really paranoid then governments can in effect try to kill the underground economy by reissuing currency. Happens all the time in emerging markets. When you pop up to the bank line with your $100k cash then the questions as to source of money start getting asked. It's a great way of shutting down untaxed money.

Note in the UK (and I assume US as well?) £10k is the magic number for money laundering. 10k or 'any suspicion'. The receiving agent can go to prison if they don't report the suspicious deposit.
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Post by Valuethinker »

JasonP wrote:If you want simple, auto-pilot investing that also meets these stipulations, I would just put it all into Amana funds and they will make sure you're doing right.

As a side question, I noticed he said 'Real Estate' and was thinking about REITs. I haven't seen it mentioned in my quick scan of the thread yet, but I would think the dividends would not be like interest in his case and he could have his real estate allocation be REITs? Probably obvious, but is that everybody's take too?
I think rents are OK in sharia compliant investments.

So since REITs are essentially rents, they should work.

No expert though.
sommerfeld
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Post by sommerfeld »

Read through

http://en.wikipedia.org/wiki/Islamic_ba ... .28gift.29

This sounds to me very much like what vanguard (and other) mutual funds do -- there is no prior committed rate of payment (interest); they merely share, as dividends, whatever profits they make from using your money, depending on what the underlying investments actually end up making.

Maybe it's just a finagle.
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Social Index

Post by BillRogers »

Hello Houston 101,

For the equity portion of your portfolio you can use the Vanguard FTSE Social Index which typically eliminate some of the "sin" industries you wish to avoid.

Best wishes,
Bill
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Post by stratton »

JETS Dow Jones Islamic Market International Index Fund (JVS)
The purpose of the JETS Dow Jones Islamic Market International Index Fund is to provide a cost effective and transparent vehicle for those who wish to comply with Islamic law, or Shari'ah, as it relates to finance and investing. To this end, the fund is managed with the goal of replicating the performance of the fund's benchmark, the Dow Jones Islamic Market International Titans 100 Index.
The ER is 0.68% and the etf has about $2.2 million and around 300 shares trade a day according to Yahoo. With that low $ amount there is risk the fund might be disolved at some point.

Paul
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Houston101
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Post by Houston101 »

bottlecap wrote:Could you buy individual bonds (maybe treasuries), donate the interest to charity and, should the bonds appreciate because of interest rate changes, cash in on the capital gain? Otherwise, hold them to maturity.
No that wouldn't work either because you are basically getting the interest in the form of capital gains instead of coupon.
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Post by Houston101 »

stlutz wrote:Since you can't use bonds to reduce volatility and risk, you should try to do this with the equity portion of your portfolio. I would look for funds that have lower volatility or Morningstar risk scores than the various total market index funds have. A good example might be Vanguard's Equity Income Fund.
Well there are some other funds like that too e.g. WisdomTree International Div ex-Finncls (DOO), but wouldn't that go against the Bogleheads approach of investing in low cost passive index funds since they are actively managed?
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Post by Houston101 »

kyounge1956 wrote:Along the same line of thought, if you bought individual TIPs and donated the interest to charities, would keeping the inflation adjustment violate the prohibition? If that is permissible, you could at least prevent your cash resources from shrinking over time as a result of inflation.
No, there is no exception for inflation.
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Re: Portfolio allocation (no bonds allowed), please suggest

Post by Houston101 »

Valuethinker wrote:My main criticism of your portfolio was that it had too much Gold. If Gold is a good investment, then why were we not buying it at $350? Even if it doubles from here, the easy money has been made (4 times from the bottom).
I agree with you Valuethinker. since I don't have bonds in my portfolio that can offer the stable returns like a typical 60/40 portfolio I was thinking about compensating for it by holding a larger percentage of Cash & gold.
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Re: preferred stock

Post by Houston101 »

Valuethinker wrote:
Eric wrote:Houston, would preferred stock be an acceptable alternative? iShares has a preferred stock ETF. I don't know much about it, so please do your due diligence.

I think preferred stock is disfavored on this forum because the credit quality is generally lower than on bonds, and many Bogleheads prefer to keep their fixed-income investments "safe." However, the greater risk might be exactly what you need to satisfy your religious criteria. Also, preferred stock may be disfavored on this forum because it offers certain tax advantages to corporate investors (so corporations may bid the price higher than you as an individual would like). But anything you buy in lieu of bonds is going to be an imperfect substitute, and require you to incur additional expense or additional risk or both.
Now that's creative!

Smart. Obvious but smart.


Since preference shares are not lending (never repaid) and are classified as a form of equity in accounting, they may well be Sharia-compliant (I'm no expert).
Here is the problem:

TOP 10 HOLDINGS FOR VEIRX Vanguard Equity-Income Adm (29.44% OF TOTAL ASSETS)
Company Symbol % Assets YTD Return %
Johnson & Johnson Common Stock JNJ 3.57 -6.69
JP Morgan Chase & Co. Common St JPM 3.38 -13.05
Microsoft Corporation MSFT 3.34 -23.16
Chevron Corporation Common Stoc CVX 3.06 -10.53
Merck & Company, Inc. Common St MRK 2.96 -2.44
Merck & Company, Inc. Common St MRK 2.91 -3.67
General Electric Company Common GE 2.86 -5.35
Pfizer, Inc. Common Stock PFE 2.81 -19.79
AT&T Inc. T 2.39 -10.17
Intel Corporation INTC 2.16 -4.09

Financials again!
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Houston101
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Post by Houston101 »

Valuethinker wrote:
JasonP wrote:If you want simple, auto-pilot investing that also meets these stipulations, I would just put it all into Amana funds and they will make sure you're doing right.

As a side question, I noticed he said 'Real Estate' and was thinking about REITs. I haven't seen it mentioned in my quick scan of the thread yet, but I would think the dividends would not be like interest in his case and he could have his real estate allocation be REITs? Probably obvious, but is that everybody's take too?
I think rents are OK in sharia compliant investments.

So since REITs are essentially rents, they should work.

No expert though.
REIT's are ok, but I don't need them since I already have an investment property (house on rent) in my portfolio.
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Re: Social Index

Post by Houston101 »

BillRogers wrote:Hello Houston 101,

For the equity portion of your portfolio you can use the Vanguard FTSE Social Index which typically eliminate some of the "sin" industries you wish to avoid.

Best wishes,
Bill
But these are actively managed funds and I want to stick with Boglehead approach of low cost passive index fund investing and not worry about what company gets picked in the fund or about the sanity of the fund manager himself.
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Post by Houston101 »

I think it will be a good idea to just buy all the Sector ETF's from Vanguard excluding financial's and balance them on what the S&P 500 would be without financial's. That should take care of the Equity part of the portfolio.

I am still not sure about what use for the bond side. I am thinking may be holding a Utilities sector Fund like VPU might be helpful.

What do you guys think?
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zero coupon bonds sharia compliance

Post by joppy »

Are zero coupon bonds Sharia compliant?

There is a balloon payment at the end, but no ongoing interest.

If you sell the zero coupon bond, you have effectively benefited from "capital appreciation". (Though, as far as the IRS is concerned there is implicit interest that you have to pay taxes on -- so perhaps Sharia treats this the same way.)

- Joppy

Edit: I guess not. It appears that zero coupon bonds and preferred shares are still considered debt. This page gives the tests for shariah compliance:
http://stockexchangepakistan.info/shari ... ks-at-kse/
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Post by SamGamgee »

One thing that hasn't been mentioned is buying options that limit the downside of your equity investments. Isn't the riskyness of equities one of the primary reasons for holding bonds? You could just invest yearly in year-long options that allow you to sell x% of your equity holdings (Use ETFs) at a price y% lower than their current value. Adjust x and y to match your risk tolerance.

Shouldn't be too expensive.
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Eric
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Re: preferred stock

Post by Eric »

Houston101 wrote:
Valuethinker wrote:
Eric wrote:Houston, would preferred stock be an acceptable alternative? iShares has a preferred stock ETF. I don't know much about it, so please do your due diligence.

[snip]
Now that's creative!

Smart. Obvious but smart.


Since preference shares are not lending (never repaid) and are classified as a form of equity in accounting, they may well be Sharia-compliant (I'm no expert).
Here is the problem:

TOP 10 HOLDINGS FOR VEIRX Vanguard Equity-Income Adm (29.44% OF TOTAL ASSETS)
Company Symbol % Assets YTD Return %
Johnson & Johnson Common Stock JNJ 3.57 -6.69
JP Morgan Chase & Co. Common St JPM 3.38 -13.05
Microsoft Corporation MSFT 3.34 -23.16
Chevron Corporation Common Stoc CVX 3.06 -10.53
Merck & Company, Inc. Common St MRK 2.96 -2.44
Merck & Company, Inc. Common St MRK 2.91 -3.67
General Electric Company Common GE 2.86 -5.35
Pfizer, Inc. Common Stock PFE 2.81 -19.79
AT&T Inc. T 2.39 -10.17
Intel Corporation INTC 2.16 -4.09

Financials again!
VT, thanks. Actually, it was my wife's suggestion when I mentioned this thread in dinner-table conversation.

Houston, I think that's the list for Vanguard's Equity-Income Fund, not the iShares preferred stock ETF. But the list for iShares is actually more financial-heavy, so I take your point. You could avoid the problem by investing directly in preferred stock of non-financial companies, but I recognize that it may be difficult to assemble a diversified portfolio that way.
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Houston101
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Re: zero coupon bonds sharia compliance

Post by Houston101 »

joppy wrote:Are zero coupon bonds Sharia compliant?

There is a balloon payment at the end, but no ongoing interest.

If you sell the zero coupon bond, you have effectively benefited from "capital appreciation". (Though, as far as the IRS is concerned there is implicit interest that you have to pay taxes on -- so perhaps Sharia treats this the same way.)

- Joppy

Edit: I guess not. It appears that zero coupon bonds and preferred shares are still considered debt. This page gives the tests for shariah compliance:
http://stockexchangepakistan.info/shari ... ks-at-kse/
Zero coupon bonds or regular bonds, they are both paying interest interest, the only difference is the timing of payment and how the IRS treats it.

Shariah & IRS could care less about each others definations :roll:
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Houston101
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Post by Houston101 »

SamGamgee wrote:One thing that hasn't been mentioned is buying options that limit the downside of your equity investments. Isn't the riskyness of equities one of the primary reasons for holding bonds? You could just invest yearly in year-long options that allow you to sell x% of your equity holdings (Use ETFs) at a price y% lower than their current value. Adjust x and y to match your risk tolerance.

Shouldn't be too expensive.
Yes that would work if I was concerned about riskiness.

What I really want is a portfolio without bounds that can generate stable returns like a 60/40 portfolio during market downturn. Buying options only hedges the downside risk, nothing else.
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Post by Tramper Al »

Houston101 wrote:What I really want is a portfolio without bounds that can generate stable returns like a 60/40 portfolio during market downturn. Buying options only hedges the downside risk, nothing else.
So, you might be able to smooth long term variability on a par with 60/40 by using various and assorted non-bond assets, but I don't think you can expect any close tracking of 60/40 during any particular period. In late 2008, plenty of 60/40 portfolios didn't behave at all like those in which the 40 was nominal US Treasuries.

Sorry if I missed a comment on it, but did you see my suggestion above for LEAP call options on TLT? The call holder is not paid interest. All gains/losses are in the form of capital, I believe.
Last edited by Tramper Al on Wed Aug 04, 2010 12:58 pm, edited 1 time in total.
BillRogers
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Religious Investing

Post by BillRogers »

Hello Houston 101,

The FTSE Social Index is an index that excludes the "Sin" industries such as tobacco, gambling, weapons manufacturer's etc. It is active in the sense that it excludes these industries, but you portfolio is also active in that it must exclude certain asset classes and types of companies. This fund attempts to track the FTSE4Good US Select Index. The expense ratio is 0.29%.

Another alternative would be to buy the State Street Sector Spider ETFs in the sectors that comply with your religious beliefs. There are ETFs using the sub sectors of the ten setor funds to make your investments more granular. Of course you will be adding mor moving parts.

Best wishes,
Bill
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SamGamgee
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Post by SamGamgee »

Houston101 wrote:
SamGamgee wrote:One thing that hasn't been mentioned is buying options that limit the downside of your equity investments. Isn't the riskyness of equities one of the primary reasons for holding bonds? You could just invest yearly in year-long options that allow you to sell x% of your equity holdings (Use ETFs) at a price y% lower than their current value. Adjust x and y to match your risk tolerance.

Shouldn't be too expensive.
Yes that would work if I was concerned about riskiness.

What I really want is a portfolio without bounds that can generate stable returns like a 60/40 portfolio during market downturn. Buying options only hedges the downside risk, nothing else.
Well, to be fair, it also limits the upside. (Because you have to use some of the return on equities to buy the options!)

I'm curious, why do you want to replicate a 60/40 portfolio if not to receive some high returns (stocks) while limiting risk (bonds) ?
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Post by linenfort »

This is a fascinating thread. Houston, I imagine you have posted this same question on Islamic forums. If you get some creative answers there, please repost them.
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Post by BigD53 »

[inappropriate comment deleted by admin alex]
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Post by stratton »

if the "real" yield on Ibonds goes to zero you might (?) be able to buy those. Currently it's at 0.2%. The "payoff" is tax deferral and build up of the inflation portion of hte bond.

Paul
...and then Buffy staked Edward. The end.
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Opponent Process
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Post by Opponent Process »

BigD53 wrote:Due to religious reasons I cannot invest in bonds (interest is not allowed)

Any chance that you can change Religions??? :roll:
well, remember you always have to consider investor time horizons, both in this life and the next.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
sommerfeld
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Post by sommerfeld »

More background reading:

"Don't Call It Interest"

http://www.forbes.com/forbes/2007/0723/122.html
So how do you make a mortgage or a leveraged buyout compliant? "The fundamental philosophical difference between Islamic finance and conventional finance is that risk must be shared and the counterparties must have an active stake in the business," the sheikh explains. So, the bank helping you buy a house is not exactly lending the money. Rather, you're buying the house together.

Guidance Financial Group of Reston, Va. creates a partnership with a home buyer to purchase a house, in a transaction called musharaka. Over time the homeowner buys more and more equity in the partnership until he buys out Guidance and owns the house outright. Devon Bank of Chicago, meanwhile, relies mostly on a transaction called murahaba. The bank buys the house, then sells it to the buyer at cost plus a pre-agreed-upon profit, paid in installments. In either case--even if interest rates are used to price the product--the act of paying interest is technically sidestepped.
This is how one mortgage banker analyzes such deals: "The price for getting into heaven is about 50 basis points."
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Post by SamGamgee »

[response to inappropriate comment deleted by admin alex - please let a mod or admin know if you see a problem]
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Post by linenfort »

I'd like to second what SamGamgee just wrote, and what Tramper Al wrote on page 1. One of the great things about this forum is what it is not. It is NOT the cesspool that is yahoo finance message boards or imdb message boards. Can't we just focus on the issue instead of criticizing? (full disclosure: pork-eating atheist of Hebrew extraction here).
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Post by bottlecap »

Houston101 wrote:
bottlecap wrote:Could you buy individual bonds (maybe treasuries), donate the interest to charity and, should the bonds appreciate because of interest rate changes, cash in on the capital gain? Otherwise, hold them to maturity.
No that wouldn't work either because you are basically getting the interest in the form of capital gains instead of coupon.
Let me premise this by saying that I know very little about Sharia law, so if you know what you're talking about, you can ignore this - but are you sure that capital appreciation on bonds is considered interest? It would seem to me that it's the same type of capital gain that gold or real estate might produce.

Again, I don't know the rules - but it might be worth double checking.

Good luck,

JT
sommerfeld
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Post by sommerfeld »

for whatever reason, I find this topic fascinating.

Another source suggests that inflation-protected securities paying no "interest", or which pays interest which merely preserves purchasing power should be ok to at least some authorities:
Riba

The word "Riba" means excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart", or "to ensure equivalency in real value", and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).

Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them.[9] When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in a higher number of units of this fiat money being riba" was not relevant as the jurists only needed to be concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).
(from http://en.wikipedia.org/wiki/Islamic_banking)

Other sources indicate that "Riba" can also be translated as "Usury".

However, it's worth noting that in european christian culture "Usury" and "Interest" were once synonyms, and the seemingly strange structures common in Islamic finance have precursors in medieval christian europe:
A modern Islamic banker would readily recognize a contractum trinius, a structured, 13th-century financial product designed to circumvent the medieval Catholic Church's proscription of usury.

It was mostly illegal in Christian medieval Europe to charge interest on a loan of money, for much the same reasons Islamic law forbids it: That, as money is intrinsically unproductive, it is ethically wrong to make money from money. A contractum trinius replicated a fixed-interest loan by combining three simultaneous transactions--an investment by the "lender" in the "borrower," an insurance contract and a profit-share arrangement for a fee--each acceptable in their own right under canon law.

The ecclesiastical loophole was that the Church allowed modest "compensation" over and above the amount due on a loan for the hazards and delays of repayment or any legitimate reason providing it was not intrinsic to the contract. The simultaneous contracts could be arranged to replicate any agreed interest rate while providing legal protection against default on one side and loan sharking on the other.
http://www.forbes.com/2008/04/21/christ ... ieval.html
Last edited by sommerfeld on Thu Aug 05, 2010 5:04 pm, edited 1 time in total.
spencer99
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Post by spencer99 »

Houston101 wrote:Yes this is related to Islamic Shariah restrictions.
Hi Houston101,

Your comment that we all make some small concessions to our values is well taken. We do live in the real world. Nevertheless, this must be tough to do. That said, and I'm mostly kidding you a little here, this reminds me of St. Augustine's prayer as a young man, "Lord, make me pure, but not yet." :)

On a more serious note, the Islamic prohibition against interest (and I think Christianity's similar prohibition) was from a time when inflation was not an issue (money was specie). Couldn't a case be made that it is not real interest until you've exceeded inflation? Certainly some portion of any interest received is an off-set of inflation and that would include most/all bank accounts.

Best,

Spencer
nonnie
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Post by nonnie »

linenfort wrote:I'd like to second what SamGamgee just wrote, and what Tramper Al wrote on page 1. One of the great things about this forum is what it is not. It is NOT the cesspool that is yahoo finance message boards or imdb message boards. Can't we just focus on the issue instead of criticizing? (full disclosure: pork-eating atheist of Hebrew extraction here).
I third what you said--thanks to you, Tramper Al and SamGamgee.

Nonnie
Valuethinker
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Post by Valuethinker »

[edited]
Last edited by Valuethinker on Sat Aug 07, 2010 7:31 am, edited 3 times in total.
Valuethinker
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Re: Religious Investing

Post by Valuethinker »

BillRogers wrote:Hello Houston 101,

The FTSE Social Index is an index that excludes the "Sin" industries such as tobacco, gambling, weapons manufacturer's etc. It is active in the sense that it excludes these industries, but you portfolio is also active in that it must exclude certain asset classes and types of companies. This fund attempts to track the FTSE4Good US Select Index. The expense ratio is 0.29%.

Another alternative would be to buy the State Street Sector Spider ETFs in the sectors that comply with your religious beliefs. There are ETFs using the sub sectors of the ten setor funds to make your investments more granular. Of course you will be adding mor moving parts.

Best wishes,
Bill
Ethical funds tend to include financials. So they would not be sharia-compliant.
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Post by Valuethinker »

Houston101 wrote:I think it will be a good idea to just buy all the Sector ETF's from Vanguard excluding financial's and balance them on what the S&P 500 would be without financial's. That should take care of the Equity part of the portfolio.

I am still not sure about what use for the bond side. I am thinking may be holding a Utilities sector Fund like VPU might be helpful.

What do you guys think?
Yes utilities are somewhat like bonds.

They used to be wholly so, but then with deregulation equity risk has crept in.

It's a good thought.

Here's another. Use the Preference Shares ETF and 'cherry pick' an equally weighted individual portfolio of, say, 20 different preference shares (non financials). That would give you a 'bond like' return (and risks!) but spread it out. Setting it up and buying the shares in small quantities would be a pain, but, once done, it's done.

You could do the same with equities generally. Look at the top 25 stocks in a VG dividend fund, strip out the financials, and buy those. Approximately equal weightings would be OK.

It's a pain to set up. Dealing costs. Paperwork. Some will have Dividend Reinvestment Programmes and you could use those. But once set up, it actually won't take too much to maintain (it's been my father's strategy for 40+ years).

You will be more volatile than the stock market as a whole, but with somewhat higher income. Modern evidence says you need about 40 stocks to 'track' an index with little risk of deviation, and by excluding financials you will not track it well. But with the 25 largest stocks, you will over the very long run, do quite close to the index, I suspect.

On gold, I don't think gold is a 'cash like' asset. I think it is more volatile than equities. OK it has low correlation with equities and so is diversifying, but it is low return. See William Bernstein's article on Efficient Frontier (something like 'the most patient investment').

I would not have more than 5-10% assets in gold. It might be different if I lived in Pakistan, where hyperinflation, confiscation and deficient corporate governance against minority shareholders are a reality. But in the USA, you don't need to hold that much in hard assets.

There is this ETF of Sharia compliant equities? I would look into that-- it could be a core component of your portfolio.

Also if you buy real estate for cash. I have expressed reservations, but it sounds like you know what you are doing, and as I have said I am reasonably confident about Houston real estate (without knowing much about it): Houston has a diversified economy, in some ways worse hit by Enron than now, Houston is a magnet for immigrants, Texas residential real estate was never overvalued and subprime lending was controlled.

Hence residential real estate in Houston (small properties, well located) should be 'bond like' in returns, but offering additional long run inflation protection.
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Houston101
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Post by Houston101 »

Guys I really appreciate the comments from all of you.

In the end I have realized that I don't know much about Islamic Finance either. The complications of modern finance requires that I study Islamic finance in detail to know what can be done.

To summarize, the intellectual contribution from all of you has forced me back to the studying room. It took me so long to just catch up with modern finance concepts and Islamic finance is whole different game. It feels like I have been playing basketball all my life and suddenly I have realized I need to understand baseball also to be a better player.

I will be back on this thread once I have done some study on this topic.

Thank you everyone.
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Post by Default User BR »

Houston101 wrote:In the end I have realized that I don't know much about Islamic Finance either. The complications of modern finance requires that I study Islamic finance in detail to know what can be done.
You might want to see if you can find an advisor familiar with the subject.




Brian
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Post by leonard »

You do realize that corporations - of which you are an owner if you own stock via a mutual fund - receive interest payments, right?

EDIT: maybe there are index funds or other options that invest only in zero coupon bonds.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
JTravers
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Post by JTravers »

Houston101 wrote:Guys I really appreciate the comments from all of you.

In the end I have realized that I don't know much about Islamic Finance either. The complications of modern finance requires that I study Islamic finance in detail to know what can be done.

To summarize, the intellectual contribution from all of you has forced me back to the studying room. It took me so long to just catch up with modern finance concepts and Islamic finance is whole different game. It feels like I have been playing basketball all my life and suddenly I have realized I need to understand baseball also to be a better player.

I will be back on this thread once I have done some study on this topic.

Thank you everyone.
Just saw this thread. I'm going down the same road of trying to develop a Boglehead-style Shariah-compliant portfolio. I'm still studying up on the portfolio allocation topics but have already done a lot of the Islamic finance research (I've taken one intro Islamic finance course and will be taking more, God willing, in the future).

It'd be great for us to try to hash out these ideas together and with the help, of course, of the other knowledgeable participants on this forum.

I've looked at the Amana funds and have come away pretty impressed. Granted, they are not passive funds (and they have expense ratios that prove that), but they seem to behave very well and are diversified enough that they haven't had the same risk as most active funds.

AMANX seemed to track the DFA US Large Cap Value Fund pretty well up until the financial crisis hit.
goo.gl/OJD9
(I'm not permitted to post links, yet, so please bear with the formatting.)

Of course, including the crisis, AMANX has outperformed.
goo.gl/1OAg

I did a 3 factor regression a while back. Off the top of my head, AMANX's beta was 0.8, the SmB coefficient was 0, and the HmL coefficient was 0.4. I did that in early 2008, so the results could have changed. If I have the time, I'll update the regression and post the results. I'll try to do the same for the Amana Growth fund, as well.

For the equity component, I've only gotten as far as this:
AMANX for US market exposure with a value tilt
JVS for international exposure
AMDWX for emerging markets

I'm taking a risk that JVS & AMDWX behave in a way one would expect from a fund in those categories. But the pickings are pretty slim when it comes to Shariah-compliant investments in the US. One could always go the route of constructing an index portfolio yourself, but that will end up being quite tedious -- especially since the components of the Shariah equity indexes mostly seem to be proprietary information that the index companies don't disclose unless you pay them for the data.

No idea on coming up with an equivalent for the bond component. I guess gold can substitute for the "flight to quality" component of bonds and cash for "stability of value", but I doubt that is enough. There must be a way to access sukuk trading on foreign exchanges. That will probably require a lot more research, though.

If you have any comments, please let's continue with the discussion. And I'd be happy to look up answers from a reliable source to any questions that come up here.
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