You might have guessed that we have entered a period of financial and economic adjustment. Central banks have lowered interest rates and will lower them further as they seek to minimize the impact of unwise investments by the public and by banks. These unwise investments are imploding in value as people react suddenly to bad news.
Indices
There are a number of things that you can do to help yourself avoid the worst of the financial storm occurring around you. You know that when a mathematician advises investors to do something specific with their money, this can form a feedback loop and the process can be self defeating. More than ever, it is important to work with the financial mathematics and let them help you. My approach is that there are two mathematical averages that you need to master.
These mathematical tools depend on you having access to price information of the investment opportunies that you wish to invest in. You need to gather price information and analyse it for clues. Price data is historical data so you need to think that it relates to a series of events and flows of information, sometimes the impact of which is moving in different directions and individual prices may not be following the general flow. Watch out for such prices and analyse them separately. Almost everything has a price and with the internet it is easier than ever to find that price, construct a comparative index and make a wise decision based on what you know.
Gather as much information about the forces driving the prices that you are researching. Economists use sophisticated econometric models to do this. Because of non-linearities in world financial events, you may need to re-estimate your models every day! We are very far from understanding all the forces affecting economic data! Don't let anyone tell you otherwise.
The average
The first tool needed is the ordinary weighted average for which you construct an index.
The logarithmic average
The second tool is the logarithm of that average by which you construct another index.
The first index tells you the weighted average of value, while the second index tells you the weighted average of change in value.
Use these indices to guide your actions. Either create them yourself or buy them from someone who has the mathematical know how of creating them. Stock market indices are weighted indices and are useful for investing in the stock market. You can create your own stock market index and use it. You logarithmic average index you can use by set each data entry to its absolute value. From the resulting index values you can devise a further index of individual or group volatility.
Relative position of indices and of volatility indices help you decide whether you wish to move into or out of a specific sector or economy or your own chosen group of investment opportunities based on the mathematics alone.
Use Microsoft excel or a similar spreadsheet to organize your information initially. You may be an expert in data organization or have a familiarity with php some other programming language. If so you can create your own web pages of financial information based on averages and logarithmic averages for the prices that you have to deal with.
The SDR is a weighted average of exchange rates. The IMF, International Monetary Fund, publishes the value of the US dollar in SDR term each day. The reason it does this is so that people around the world can see a 'real' value of the US dollar and not just its nominal value. The real value or the SDR value of a currency is just one index that you can use to assess where to invest your money wisely.
The importance of the 'real' SDR value of a currency is that it compares a currency value against the performing and largest contributors to the world financial scene. The SDR is an index comprised of the US dollar, the Euro, the Yen, and the UK pound. There is also an index for the interest rates of the four major currencies called the SDR interest rate. These indices are weighted indices calculated on business days and published through the IMF website.
Thinking behind the SDR
The IMF is probably the most critical organization in the world on a day to day basis if we are to avoid a world economic crisis. Some leaders don't believe in long term investments and just manage investments for the short term swinging with public opinion and their own budgets that they have managed to screw up. The IMF is a long term investment having the expertise that the world needs to avoid major economic slumps. The IMF research people like those people who are researching key energy projects are under threat from short sightedness an opportunism of today's leaders. What about tomorrow? Will you know what investments to make tomorrow?
The SDR is a well constructed index that gives one a way of foreseeing the future of the world economy and of national economies. That I will discuss at a later date.
