Market Volatility and the Need for Diversification

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If you’ve been keeping up with the markets recently, you’ve witnessed the textbook example of market volatility. Early March 2025 saw the S&P 500 drop by 10% below its all-time peak levels, and the US stock market briefly lost $4 trillion in value after President Donald Trump hinted at the possibility of a recession.

While we're already beginning to see early signs of recovery with an upward rally, these market fluctuations remind us that stock markets are inherently cyclical. 

For investors, a crucial strategy for navigating these market fluctuations is diversification. By building a well-balanced portfolio that includes different asset classes, you can reduce your overall risk. When one part of your portfolio (like stocks) experiences volatility, another (like real estate) can help stabilise the overall impact.

In this article, we’ll explore:

• The causes of stock market volatility and how markets typically recover
• Why real estate provides stability when stock markets fluctuate
• How Wahed enables accessible, Shariah-compliant property investment

The Volatility of the Stock Market: Why it Happens and How it Recovers

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What is a stock market crash?

A market crash refers to an abrupt decline in the stock market index over a short period. These crashes happen when the market enters an unstable phase and then encounters an economic shock that triggers widespread panic selling.
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What triggers a stock market crash?

Common factors that lead to market crashes include:

1. Excessive Speculation & Market Bubbles: When investors overinflate the value of certain assets (e.g., 2000 dot-com bubble), a sudden correction can lead to a crash.
   
   
2. Economic Recession or Slowdown: A weakening economy, declining corporate profits and high unemployment can drive stock prices down.
   
   
3. High Interest Rates: Rising rates make borrowing more expensive, slowing down businesses and reducing stock market growth.
   
   
4. Financial System Problems: If major institutions fail (e.g., the 2008 mortgage crisis), panic spreads, leading to mass sell-offs.
   
   
5. Geopolitical Tensions & Wars: Wars, sanctions and global conflicts create uncertainty, making investors pull money out of risky assets.
   
   
6. Government Policies & Regulation Changes: Sudden changes in tax laws, trade policies or monetary policies can impact stock prices.
   
   
7. Black Swan Events (Unexpected Crises): Events like COVID-19 can cause sudden market disruptions.
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Does the stock market eventually recover?

Yes. While market downturns can be concerning in the moment, history shows that diversified stock portfolios have recovered over time. Since 1957, the S&P 500 has delivered an average annual return of approximately 10% despite periodic downturns.

The modest signs of recovery we're beginning to see in recent weeks serve as a gentle reminder that market cycles are normal. They are part of the investment journey. They test investor discipline — and that’s where long-term thinking matters. Riding out these waves, rather than jumping ship, has historically rewarded investors.

However, every period of market uncertainty reinforces the importance of diversification. Instead of relying solely on one asset class, investors can protect themselves by building a portfolio that includes assets like real estate, which may follow different cycles than the stock market.

The Stability of Real Estate Investments

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Unlike stocks, real estate is a physical asset that produces utility and income, regardless of daily sentiment. Its performance is generally not tightly correlated with stock market fluctuations and is known for performing well during economic downturns, as demand for housing remains relatively consistent.

Key benefits of real estate investments include:

• Tangible Asset: Unlike stocks, real estate has intrinsic value as a physical asset.
• Lower Volatility: Property prices don’t experience the same level of daily fluctuations as stocks. 
• Income Generation: Properties potentially continue generating rental income even during economic downturns.
• Long-Term Growth: Historically, property values appreciate over time, offering investors a steady wealth-building opportunity.

Benefits of Diversifying with Real Estate

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A key principle of investing is diversification, which, simply put, means spreading investments across different asset classes to reduce risk. Including real estate in your portfolio helps balance exposure to high-risk assets like stocks and provides a stable counterweight during downturns.
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1. Stability during market downturns

Over the last ten years, UK real estate posted positive annual returns in all the months when the S&P 500 recorded negative returns.

The graph below shows months where the S&P 500’s last 12-month return was negative. In those same months, UK housing returns remained positive. This pattern highlights how real estate maintains stability even during periods of stock market decline.

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2. Real estate vs. stocks performance gap

Over multiple timeframes (3, 5, 10, 15 and 20 years), UK real estate has generated relatively positive average annual returns of at least 10% during periods when the S&P 500 posted negative returns. This reaffirms real estate's role as a stabilising asset that can deliver positive performance even when stock markets struggle.

The graph below shows real estate performance compared to the S&P 500 during months with negative stock market annual returns. We calculated this by examining different time frames. We identified months when the S&P 500's trailing annual return was negative and checked the UK housing annual return during those months. In those months, we subtracted the S&P's return from the real estate return to calculate relative performance. Finally, we averaged that relative performance over the last 3, 5, 10 and 15 years. 

This approach reveals how much better real estate performed as compared to stocks during those volatile months.

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3. Diversification reduces risk

a) Theoretical evidence: Modern portfolio theory

The idea of investing in multiple assets to achieve greater returns without a higher risk comes from Modern Portfolio Theory (MPT), introduced by Harry Markowitz in 1952—work that earned him a Nobel Prize.

MPT argues that a portfolio's performance depends not just on individual assets but on how these assets work together. Essentially, constructing a portfolio of multiple assets can result in greater returns without increasing risk. This is because different assets often don’t move in the same direction at the same time. For instance, if one investment faces a loss, another might perform well, balancing the overall portfolio.

By including assets like real estate alongside stocks or bonds, investors can reduce the overall risk while still aiming for strong returns. This strategy is why diversified portfolios are often more resilient during market fluctuations.
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b) Data evidence: lower portfolio volatility with real estate

According to KKR research, adding real estate to a portfolio allows for comparable returns with a lower risk over the long term. Historically, broad exposure to real estate has reduced the volatility of a portfolio composed of stocks and bonds. This means that by including real estate, investors could achieve similar returns while facing less risk.

The graph below compares the efficient frontier of portfolios with traditional assets (like stocks and bonds) versus portfolios that include real estate. The efficient frontier represents the best possible return for a given level of risk. As shown, portfolios with real estate (purple line) achieve the same returns for lower levels of risk compared to portfolios without real estate (orange line).

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c) Low correlation between real estate and stocks

Empirical evidence shows that the correlation between stocks and real estate is less than 1 over a long term, indicating these asset classes do not move perfectly in sync. When stocks are down, real estate does not necessarily follow the same trend and vice versa.

This lack of perfect correlation can minimise overall portfolio risk, as losses in one asset may be offset by gains in another. By combining assets with low correlation, investors can reduce portfolio volatility and make their portfolio less susceptible to market swings.
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4. Fewer negative quarters compared to stocks

Over different timeframes (3, 5, 10, 15 and 20 years), the S&P 500 has experienced more quarters with negative rolling annual returns than UK housing. This indicates that real estate investments have been relatively more stable, encountering fewer instances of negative returns compared to the stock market.

The graph below highlights the number of quarters where the S&P 500 recorded negative returns compared to UK housing prices. It clearly shows that real estate had significantly fewer negative quarters, indicating that it can add stability to an investment portfolio, especially when stock market performance is unpredictable.

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5. Consistent income through rental yields

One of real estate's primary advantages is its ability to generate ongoing income through rent. A well-located residential property can potentially offer a reliable monthly cash flow regardless of market conditions. At the same time, the property itself may appreciate in value, allowing for potential capital gains when sold.

Fractional Real Estate: Making Property Investments Accessible

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While real estate is an attractive asset class, traditional property ownership often requires large capital investments. Real estate platforms like Wahed provide a Shariah-compliant way for investors to access property investments without the need for mortgages or large capital requirements.
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How Wahed’s investment model works

• Pooling Investments: Investors collectively fund the purchase of properties
• Special Purpose Vehicle (SPV): Each property is held under a separate company, and investors receive proportional ownership
• Rental Income Distribution: Investors earn passive income from rental yields, ensuring Halal wealth growth without interest (Riba)

For more information, read our previous blog on this topic.
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Advantages of Wahed real estate

• Asset-backed security: Investments are tied to physical property, providing tangible value
• Interest free investing: Traditional mortgages involve interest, which is prohibited in Islam, but alternative riba-free real estate models exist
• Low minimum investment: Start with as little as £500, making real estate accessible to more investors
• Professional management: Properties are managed by experts so you can invest without any hassle

Read more on why choose Wahed for real estate here.

While real estate is generally stable, it is important for investors to conduct due diligence and manage risks effectively. Some strategies include:

• Diversifying across multiple properties to reduce exposure to a single market
• Review property details carefully and understand local market trends
• Investing in professionally managed properties, such as those offered by Wahed’s real estate

Conclusion

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When financial markets face heightened uncertainty, it’s natural to feel concerned about where your money is going. But successful investing isn’t about reacting emotionally — it’s about building a resilient, diversified portfolio that can weather volatility while growing steadily over time.

Stock markets will always go through cycles. While they offer strong long-term returns, they’re also exposed to short-term shocks. This is why diversification matters. And this is where real estate shines — offering stability, passive income and long-term appreciation through physical, asset-backed investments.

At Wahed, our real estate platform gives everyday investors access to this powerful asset class without the need for large capital or complex management. From as little as £500, you can invest in professionally managed, Shariah-compliant UK properties that align with your values and financial goals.

Whether you’re new to investing or simply looking for balance in today’s unpredictable environment, real estate can be a meaningful addition to your portfolio.