It's becoming increasingly apparent that a tapering of the Fed's bond-buying program is drawing closer. According to CNBC, "Both on the sidelines and in public at this year's economic symposium in Jackson Hole, Wyo., Fed officials suggested that a September taper is more likely than not."
And while the taper would like be just that, a slight reduction in bond buying as opposed to a full elimination, it could still come as a shock to the economic system and the stock and bond markets in particular. Therefore, I'm preparing some taper tactics in the event that things don't go exactly as planned.
Preparing for inflation
If interest rates rise, the effect could be widespread. In some ways this could be a good thing as savers are once again able to get something for their efforts as opposed to .05 percent on a savings account. On the flip side though, inflation might start rearing its ugly head.
A great hedge against such inflation may come in the form of I series government savings bonds. The rates for these bonds are in part based upon inflation and are created to keep pace with inflationary pressures. If nothing else, they can present a safe investment option like a savings account or certificate of deposit that not only minimizes risk but that better protects the buying power of your dollar.
A dollar cost average reinvestment plan
Even though we likely know that the taper is coming, it's hard to say just how the stock market with react. Personally, I'd rather be ready for a big correction and not have one than be caught off guard by sharply falling stock prices.
Dollar cost averaging can help me be better prepared for a more volatile market. By keeping my market holdings in a broadly diversified dividend reinvestment plan, I can allow them to move with the swings of the market, yet continue to build my share holdings through monthly dividends reinvested and dollar cost averaged as the market moves.
Readying a cash reserve
An emergency fund is a good thing to have on hand for a variety of situations. Car problems, home repairs, new appliances, and similar unexpected costs can pop up, and having extra cash on hand can help a family avoid having to go into debt to cover such expenses. However, a cash reserve can be even more useful if bolstered enough so that it's ready for investment opportunities that might arise in a taper-type situation.
Who knows for sure how the stock market will react when the taper finally hits. Heck, who knows how the entire economy will react. And while job loss, high prices at the pump and other financially shocking scenarios could call upon an emergency fund, things like great buying opportunities could also present themselves. This is why I'm working to bolster what is usually a $5,000 emergency fund up closer to $10,000. In this way, we're prepared not only for a financial emergency, but we're ready to take advantage of any sort of opportunity -- stock, bond or commodity related -- should one present itself.
And if it doesn't, then we're better prepared to replace our aging vehicle when the time comes.
In these ways, I feel better prepared for when the Fed begins to taper no matter what such a move might bring with it.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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