Why an interest-free savings account RRSP can be a good investment

I got an email a couple of months ago from a Muslim Link reader who had a question about halal investing. Her employer offers a company-matched RRSP (Registered Retirement Savings Plan) program. So she could contribute a portion of her pre-tax income to an RRSP and the employer would match her contributions up to a limit.

They gave her a menu of investments to choose for her RRSP.  She didn’t know which, if any, were halal, so she asked me to have a look.

I’ve had a couple of other friends ask me something similar and unfortunately, none of the options that were offered were halal. They all had either a fixed income component (i.e. bonds, GICs) or they were investing in non-compliant companies (mostly banks).

This reader’s options were no different. I told her the unfortunate news, but that wasn’t the end of this story.

She went back to her employer and insisted that she be given a halal investing option — or at least something that doesn’t involve fixed income, interest-based investments or investments in non-Shariah compliant companies.

They gave her an RRSP account that pays no interest but also doesn’t invest her money in anything.

She asked me to verify if that was halal. I told her it was just like a regular no-interest bank account. Sure, it was halal, but there was no obvious benefit to putting money in there either.

Except…

There is an obvious benefit:

If her company is matching her contributions, every dollar she puts in there is doubled.

Also, she’s contributing pre-tax income. So, assuming her income is taxed at 35%, every $1000 she puts into the account only reduces her paycheque by $650. Plus, it’s being matched by her employer. So, by reducing her take-home pay by $650, she gets to increase her retirement savings by $2000.

Finally, contributions to her RRSP are deducted from her gross income.  So when it comes to calculating her income tax, so her income tax bill will also be lower.

This no-interest savings account is actually one of the best halal guaranteed investments you could make!

A Streamlined Path to Investment Growth with Wealthsimple Halal Portfolio – A Fundamentals Portfolio Analysis

Bio: Amin Patel, MSc. PEng is the founder of www.assurednuclear.com. He is a Nuclear Engineer/Scientist by profession and is not a financial advisor. Trading and Investing on the stock market is simply one of his many passions and interests. He runs the PrinceAmori Youtube channel  (with 55k+ subscribers) and also happens to have three IMDB listings for his video footage contribution to an Asian television series (Filipino in case you are wondering).

A Streamlined Path to Investment Growth with Wealthsimple Halal Portfolio – A Fundamentals Portfolio Analysis

  • Why pay fund managers extra when Wealthsimple charges less?
  • Reduce worries about screening halal stocks by letting Wealthsimple’s halal portfolio screening do the work for you.
  • I identify the overall outlook of the Wealthsimple portfolio by using their current stock picks as a proxy to represent past years performance, for both dividends as well as potential growth based on cash flow.
  • For this article I constructed a stock portfolio that mirror’s Wealthsimple’s current halal stock portfolio (by using equal weighting) using back data.
  • Performance indicated in this article may be different from the actual performance of the halal portfolio fund since inception, for a myriad of reasons that are discussed later in the article.

Lately I have been having conversations with my wife Sawitri Mardyani, who is the editor of the Islamic Finance section on MuslimLink about various halal investing options in Canada. I was curious what various advisors had to offer (in the niche halal investing front) and their minimums for starting an investment portfolio. I personally don’t use bank advisors and brokers, I am a Do-It-Yourself (DIY) investor, who consistently beats the TSX (Toronto Stock Exchange) and the S&P 500 (US Standard & Poors 500 index) using just Canadian stocks. Intrigued by Sawitri’s article about Wealthsimple, I decided to test Wealthsimple’s growth based approach, which incidentally is different from my personal swing trading style (See Introduction to Swing Trading).

For the technically inclined ones among you, yes, I do have “skin in the game”, I have put up my own money in a test portfolio with WealthSimple to monitor their performance for the long-term. Also, their growth portfolio is very much in line with this article’s fundamental analyses (See Introduction to Fundamentals Analysis), which is different from the technical analysis approach (see Introduction to Technical Analysis) used for swing trading. Since the time duration of my DIY portfolio and Wealthsimple halal portfolio would not be equivalent, it would be unfair for me to compare the performance for the two. Instead I have adopted a fundamentals analysis approach using tools available to me for just the Wealthsimple halal portfolio for the scope of this article.

Of course these tools are freely available to the reader as well (my affiliate link here if you want to use the same free tools). All the back data presented in this article originates from Simply Wall St. and is based on information from McGraw Hill Financial; the information will be presented as infographs as well as in tabular format. As a disclaimer, I make no comment about the “halal-ness” of Wealthsimple’s portfolio as they state they follow the MSCI Sharia Index methodology, the analysis of which is beyond the scope of this article. Also I shall not be commenting on the nature of halal screening either, nor debt ratios, which can be a subject of much controversy around dinner table conversations between fellow Muslim investors.

Wealthsimple halal portfolio rebalances at certain defined intervals (risk profile change) i.e. when a stock is delisted from the methodology, i.e. no longer meeting the MSCI halal criteria, or because Wealthsimple’s robo-algorithm’s ‘secret sauce’ has decided the company is no longer worth holding for the time being, Tesla (NYSE: TSLA) being a prime example of the latter situation. Note, the ‘secret sauce’ is a ‘black box’ to the end user, and one can only speculate based on various news events and increasing financial worries at Tesla’s end, Elon Musk’s recent twitter outburst certainly doesn’t help. Reminder to the reader, these are personal musings of mine, which may or or not be inputs to Wealthsimple’s algorithm J, also I do not want to be sued by Elon Musk, whom I deeply admire as a self-made engineer and entrepreneur, the inspiration behind “Iron Man” from the Marvel comic movie series.

The Wealthsimple Halal Portfolio Holdings

Holding Company Name Region
XOM Exxon Mobil US stocks
JNJ Johnson & Johnson US stocks
RDS.A Royal Dutch Shell ADR Repstg Class A

Europe stocks excluding UK

Europe stocks
TOT Total ADR Repsg One

Europe stocks excluding UK

Europe stocks
PFE Pfizer US stocks
CNR Canadian National Railway Canadian stocks
SAP SAP ADR Representing 1

Europe stocks excluding UK

Europe stocks
NVS Novartis ADR representing 1

Europe stocks excluding UK

Europe stocks
MG Magna International Canadian stocks
BP BP ADR Each Representing Six

Europe stocks excluding UK

Europe stocks
CVX Chevron US stocks
PG Oil Search ADR Other
SU Suncor Energy Canadian stocks
TRI Thomson Reuters Canadian stocks
BABA Alibaba Group Holding ADR Representing 1

Asia stocks excluding Japan

Asia stocks
DWDP DowDuPont US stocks
INTC Intel Corporation US stocks
GIB.A CGI Group Class A Canadian stocks
UN Unilever ADR Representing 1

Europe stocks excluding UK

Europe stocks
TSM Taiwan Semiconductor Manufacturing ADR Representing Five

Large, mid, and small cap stocks in developed Europe, Australasia and the Far East.

Foreign stocks
PPL Pembina Pipeline Canadian stocks
TXN Texas Instrument US stocks
CAJ Canon ADR Japan stocks
NTR Nutrien Canadian stocks
CHT Chunghwa Telecom ADR Representing Ten

Asia stocks excluding Japan

Asia stocks
MRK Merck & Co US stocks
ABB ABB ADR Representing One

Europe stocks excluding UK

Europe stocks
CRM Salesforce.com US stocks
IMO Imperial Oil US stocks
PHG KONINKLIJKE Philips ADR

Europe stocks excluding UK

Europe stocks
BHP BHP Billiton ADR Reptg 2 Foreign stocks
DHR Danaher US stocks
TJX TJX US stocks
MRU Metro Canadian stocks
UNP Union Pacific US stocks
BAX Baxter International Individual company stocks
SAP Saputo Canadian stocks
GIL Gildan Activewear Canadian stocks
ASML ASML Holding ADR Representing

Europe stocks excluding UK

Europe stocks
SNC SNC Lavalin Canadian stocks
SNY Sanofi ADR Representing 1 1/2

Europe stocks excluding UK

Europe stocks
FDX Fedex US stocks
CRH CRH ADR Representing 1

Europe stocks excluding UK

Europe stocks
AVGO Broadcom Individual company stocks
FNV Franco Nevada Canadian stocks
SBUX Starbucks US stocks
MDLZ Mondelez International Class A US stocks
BMY Bristol Myers Squibb US stocks
VALE Vale ADR Representing One US stocks

Table 1 – Wealthsimple Portfolio holdings  

The stocks in Table 1 were all in Wealthsimple’s halal portfolio at the time of this article’s writing. 

Overall Outlook

Figure 1 – Overall portfolio outlook

As the ‘snowflake’ descriptions (Figure 1) says, the wealthsimple halal portfolio is an established income portfolio with a great track record. The closer the ‘snowflake’ is to the periphery of a category, the higher the overall score.  

Portfolio Volatility

Figure 2 – Portfolio Volatility vs Market

The Wealthsimple portfolio (Figure 2) [light blue marker] is less ‘volatile’ with respect to the global market average.

 

Returns

  • The following analysis (Table 2) assumes, equal stock weightage, with no changes to the portfolio allocation weightings in the specified time period as a first order approximation.
  • Since in real life these 49 stocks have not been present as part of the Wealthsimple halal portfolio for the same duration, actual returns may reflect lower values.
  • The above two bullets helps to simplify the analysis, because the Wealthsimple Halal portfolio did not exist three and five years ago.
  • Rebalancing, ‘algorithmic’ stock allocation weightage data by Wealthsimple (along with changes to the MSCI halal shariah index) is publicly unavailable for the purpose of this analysis, for the durations listed in Table 2. Hence my use of a roughly equal weighted portfolio.
  • The portfolio for the fundamentals analysis commences on August 8, comprised of 49 stocks. The portfolio being valued at a humble CAD $1000. I have chosen this amount simply because it provides analysis numbers that are easier to understand, and pony up for an initial investment (listening young’uns?).

 

1 year ago 3 years ago 5 years ago
Amount Invested  $ 1,000.00  $    1,000.00  $    1,000.00
Portfolio value now  $ 1,180.77  $    1,361.17  $    1,662.90
% Return 18.08 % 36.12 % 66.29 %

Table 2 – Return rate on Wealthsimple halal portfolio (if equally weighted), without taking into account currency fluctuations.

Diversification

 

Figure 3 – Equal weighting (Disclaimer: Wealthsimple does not use equal weights)

 

Again, this analysis (Figure 3) assumes, roughly equal weightage, with no changes to the portfolio weightage in the specified time period as a first order approximation.

Figure 4 – Diversification across industry

 

Figure 4 demonstrates that the Wealthsimple halal stock portfolio is well balanced across various industries.

 

Conclusion:

While the analysis in this article cannot predict future performance (nor any upcoming market crashes and economic downturns), and is indicative of past performance using back data, we see from table 2 that the returns are quite favourable at 18%, 36% and 66% return for the last 1, 3 and 5 years for an equally weighted Wealthsimple halal portfolio.

Which is really good, in layman’s terms.

Recreating Wealthsimple’s 49 stock portfolio in a DIY manner would be prohibitive from a commissions point of view ($9.99 per trade with TD). For readers who do not want to pay high management fees to portfolio managers, Wealthsimple is a great alternative for starting halal investing and letting a professional firm manage your halal portfolio, they do not charge for purchases nor sales of stocks. At the end of the day, alternative private fund managers and Banks skim a fair bit of your portfolio assets as management fees. If you have a portfolio with assets above $100K Wealthsimple lowers the management fee and is even willing to provide tax-loss harvesting advice (Tax-loss harvesting is the selling of stocks at a loss to offset a capital gains tax liability), along with other perks and benefits listed on their website.

Opening an account with Wealthsimple is fairly straightforward (bonus affiliate link here) and the process is all online, for you young millennials readers who abhor walking into your neighbourhood bank, yes I know, been there done that, one myself. While my personal approach is lumpsum investing (which studies show to be 60% more effective in the long run) [See Bloomberg article for more explanationon lumpsum vs dollar cost averaging], for a first time or new investor, I would recommend, regular contributions (perhaps even automated) which leads to dollar-cost-averaging, and results in lowering the overall purchase price of your shares in the long run. Remember, we are talking about long-term investing here. I do not endorse DIY swing trading for novices.

Disclosure: While I beat the TSX (Toronto Stock Exchange) and S&P 500 (US Standard & Poors Index) with my DIY portfolio using swing trades, for the purpose of diversifying my investments, I now also have a personal Wealthsimple portfolio account, which is a more ‘balanced portfolio’ at the end of the day. Wealthsimple is available to residents of Canada, US and the UK at the time of this article.

I am expressing my own opinions; there are risks involved with investing, there are no guarantees with respect to future returns based on past performance. I have no business relationship with Wealthsimple, apart from the bonus affiliate link posted in this article.

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