LIFE IS GOING TO HAPPEN

LIFE IS GOING TO HAPPEN
One thing we can guarantee is that the Forex market is going to continue
to move because life is going to keep happening. Economies are
going to cycle back and forth between years of growth and years of
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decline. Oil prices are going to keep going up and down and up and
down. The stock market is going to go through bullish runs and bearish
declines. We’re going to be surprised by some of the things that
happen, and others are going to seem like no big deal. But as long as
the world keeps changing, you can make money in the Forex market.
To give you an idea of just how many announcement-based
changes are scheduled to take place during the year, look at Table 1.1.
You don’t have to know exactly how each one of these announcements
affects the Forex market right now. But they do, and you can
take advantage of them.
Actually, it is change that makes the Forex market function.
Imagine if nothing ever changed—economies never heated up or
cooled down, consumers never changed their tastes and preferences,
terrorists never struck, and natural disasters never occurred. The values
of currencies around the globe would never change. The global
community could institute a set exchange rate for every currency,
and you would never have to calculate an exchange rate again. As
Profiting with Forex 23
TA B L E 1.1
Annual Economic Announcement-Based Changes
Frequency of
Economic Announcement Announcement
Unemployment rate Monthly
FOMC interest rate Eight times per year
Gross domestic product (GDP) Quarterly
Consumer confidence Monthly
Consumer price index (CPI) Monthly
Balance of trade Quarterly
Current account Quarterly
Index of leading indicators (LEI) Monthly
Balance of payments Quarterly
Durable goods orders Monthly
Housing starts/building permits Monthly
New home sales Monthly
Factory orders Monthly
Business inventories and sales Monthly
Institute of Supply Management (ISM) Monthly
Purchasing manager’s index (PMI) Monthly
Retail sales Monthly
a matter of fact, this is exactly what the global community tried to
do after World War II.
Following the war, most of the major global economies—with
the exception of the United States—were in shambles. To address the
issues at hand, 730 delegates from 44 different countries converged
on the Mount Washington Hotel in Bretton Woods, New Hampshire,
in July 1944 to discuss their options. In an effort to stabilize the global
economy and help major European and Asian economies rebuild,
these delegates agreed to peg their countries’ currencies to the U.S.
dollar, which in turn would be pegged to the price of gold at $35 per
ounce.
Having pegged exchange rates allowed the signing countries of
the Bretton Woods Agreement to develop international trade agreements
and conduits without having to worry about floating exchange
rates. It became much easier to exchange goods and services, and this
relative ease of exchange led to a rapid reconstruction and expansion
of formerly decimated economies.
While pegging currencies to the U.S. dollar worked for a few
decades, the practice was ultimately discarded by larger economies
because the world changed. European and Asian economies began
to boom, the United States was involved in the Vietnam War, and the
pegged currency system ceased to meet the needs of the member
countries. It soon became apparent that currencies had to be allowed
to float freely to accommodate the various changes each economy
was experiencing.
Just as these global economies experienced mammoth changes
during the decades following World War II, our financial situations
endure changes all the time. To meet the demands of these changes in
our lives, we want to have options so that we can choose whatever
is going to fit our situation at the time and make alterations when
necessary. The Forex market offers you this ability in your investing.
Afew years ago my yoga instructor talked about the importance
of being flexible. To illustrate what he was saying, he compared
a healthy, live tree branch with a brittle, nearly dead tree branch—a
concept he attributed to an ancient proverb from India. The healthy,
live branch is flexible and can move back and forth, depending on the
direction the prevailing forces in nature are pushing it. The brittle,
nearly dead branch is not flexible, and if the prevailing forces of
nature push it too far in any direction, it will break. In other words,
if you want to be successful in life, you need to emulate the healthy,
live branch and be flexible.
24 CHAPTER 1
Rigidity in life can be unpleasant. Rigidity in the markets can be
disastrous. Be flexible. Invest your money in more than one place. Put
some in the stock market. Put some in the bond market. Put some
in the Forex market. You will find it is easier to be flexible and react
to changes in the global economy when your money is diversified.
DIVERSIFICATION
Broadway musicals run six days a week year in and year out. It
doesn’t matter if the lead actor or actress gets sick or if a chorus
dancer sprains an ankle; the show must go on. And the show can
go on because each cast has understudies who can step in and take
the place of anyone who cannot perform. For instance, if the performer
who plays the role of Simba in Disney’s The Lion King gets sick
and can’t perform, there is another performer in the cast who has also
learned the role of Simba and can step in at a moment’s notice until
the regular performer recovers. Most musicals also have a “swing.”
The swing is the most versatile performer in the cast and can play
almost any role in the show. Often, the swing is called on to step
into a role only moments before the curtain rises or after the show
has already begun because someone has been hurt or becomes sick.
Swings and understudies are essential to a Broadway musical’s success
because without them, the show can’t always go on.
Just as the show must always go on when you’re on Broadway,
your portfolio and your purchasing power must always go on growing.
Any setback in your investment portfolio or in your purchasing
power can disrupt your plans for the future. So what do you do if
one of your investments gets “sick” and can’t perform as well as you
had expected? Hopefully, you’ve diversified your portfolio, so one
of your other investments can step in and pick up the slack in growth
that your underperforming investment has created.
Most often, investors will diversify among a few mutual funds,
some bonds, and cash. They do so because most financial planners
you talk to will recommend a mix of these three vehicles. They recommend
this mix because as mutual funds are losing value, bonds
are usually gaining—or at least holding—their value, and cash is
holding its value—unless, of course, inflation is rising. On the other
side of the equation, as bonds are losing value, mutual funds will
usually be able to pick up the slack. So in essence, bonds are the
understudies for mutual funds, and mutual funds are the understudies
for bonds. This is a great strategy within your bond and
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equity portfolio. Diversification decreases risk. Unfortunately, far
too few investors are taking advantage of the “swing” of investment
vehicles: Forex.