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Inflation may be cooling but consumer prices are still high — and the Federal Reserve’s high interest rates have likely led to changes in your investment portfolio. Interest rate increases and low consumer spending amid higher prices can put a damper on the financial markets.
How can you take advantage of the impact inflation has on the market, and should you change your plan as inflation slows? Some financial experts say a hybrid investing strategy could be the best move.
What Is Inflation?
Inflation is an increase in the cost of goods and services and a decrease in purchasing power. The most common measure is expressed as a percentage and determined by the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Personal Consumption Expenditures Price Index (PCE).
When inflation is low, your dollar goes further, and you’ll likely see this play out everywhere from the grocery store to the gas station. During times of high inflation, your purchasing power drops. While high inflation is not ideal, some inflation is important to stimulate the economy.
Investing during inflation can be profitable, depending on how you structure your portfolio.
How Does Inflation Affect My Portfolio?
In 2024, inflation is cooling but still remains high.
“Inflation simply takes away the purchasing power of your money, meaning that over time, you will be able to buy fewer goods and services with the same amount of money,” explains Michael Ashley, former chief of staff at Citi and UBS. “This can greatly impact your investment portfolio, especially if your investments are not generating returns that outpace inflation.”
If you have a savings account earning 2% interest but inflation is running at 3%, for example, you’re effectively losing 1% of your money’s value each year, Ashley adds. “This will reduce the real value of your returns and can negatively affect your long-term financial goals, such as retirement savings or funding education.”
The current inflation rate is 3.3% — higher than what it was in 2020 but still a far cry from the sky-high 9.1% rate we saw in June 2022.
How to Fight Inflation With Your Portfolio
Investing can provide you higher returns than the rate of inflation, protecting your money over the long term. While the best investing strategy for you will depend on your risk tolerance, goals and financial situation, financial experts say that the following assets can help combat rising prices.
1. Stocks
Investing in the stock market is one of the key ways to build wealth over the long term, even in the face of inflation. The S&P 500, which is often used as a benchmark to measure the overall performance of the U.S. stock market, has historically experienced average annual returns of around 10%. That figure is much higher than the historical rate of inflation.
Diversifying your stock holdings can help you weather volatility since investing in assets of different sizes and sectors helps ensure that if one area of your portfolio tanks, another stays steady or even increases in value. For beginners, consider a S&P 500 index fund to get exposure to a wide range of investments at once.
“I always recommend my clients invest in stocks because they have historically outpaced inflation,” Ashley says. “Companies can often increase prices, leading to higher revenues and stock prices.”
He adds that dividend-paying stocks provide a steady income stream, boosting your portfolio’s total return.
2. Gold
Investing in gold is one of the most traditional methods used to beat inflation, and it remains extremely popular among investors.
The precious metal tends tends to become even more popular during times of inflation, since investors are seeking out what they consider safe-haven assets. You can buy gold from a bullion or coin dealer, and you can invest in it via gold mutual funds or exchange-traded funds (ETFs).
“The best aspect of investing in gold is its liquidity,” says Bill Ryze, a chartered financial consultant and board advisor for financial technology startup Fiona. In other words, you can buy and sell gold fairly easily.
But keep in mind that gold comes with risks. Its value can be volatile, and there is still the matter of insurance and storage, both of which can eat away at your profits.
3. Real Estate
Rising home prices have encouraged many investors to dive into the real estate market. Investing in real estate can require a large investment and ongoing maintenance, but it can also be an extremely beneficial investment that protects your funds from inflation. You can also generate extra income from renting your property.
Single-family homes could especially be profitable given the steady increases in home values over the last several decades.
“Real estate values generally increase over time, counteracting currency devaluation,” Ashley explains. “A fixed-rate mortgage can be particularly beneficial, as you’ll pay off debt with cheaper dollars if inflation rises.”
Another option is a real estate investment trust (REIT), which owns and manages different types of properties, such as condominiums, office buildings, hotels, shopping centers and medical facilities. They are required to pay regular dividends, making them particularly attractive to investors. According to the MSCI U.S. REIT Index, REITs have averaged an annual return of more than 10% since 2010.
4. Government Securities
Treasury Inflation-Protected Securities (TIPS) hold a variable interest rate that changes according to the inflation rate.
TIPS are based on the Consumer Price Index, so as the CPI increases, so does the value of TIPs. This gives investors a higher base value, plus a higher amount of interest paid on it.
Investments are made directly through the U.S. Treasury, a brokerage account or by investing in a mutual fund or ETF.
There is also the option of Series I savings bonds, or I bonds. Like TIPS, they are a government security, but the par value does not change. Instead, interest rates can fluctuate, changing twice a year based on current inflation. Savings bonds can be ideal in times of high inflation, but if interest rates fall, so does your profit. There is often a penalty for withdrawing funds early, making it similar to a certificate of deposit.
5. Choose a Combination
For greater protection, you can diversify your portfolio by investing in several different types of assets that provide you with a steady stream of returns. If one asset should underperform, you have others to pick up the slack.
“The best way to fight inflation is to spread your investments across different asset classes,” says Angela Ashley, a registered investment advisor and CEO of Unique Investment Advisors. “[It] helps reduce risk and increases the likelihood of some assets performing well against inflation.”
Too much weight in a particular asset class can have an adverse impact on your portfolio, she adds.
The Bottom Line
When it comes to diversifying your portfolio and combatting inflation, you have a lot of options available to you. Take the time to thoroughly research which investing vehicle will provide you with the best returns.
As interest rates change, you can adjust your investments accordingly. Just be sure to use caution, since constantly changing investment strategies could negatively impact your holdings and result in losses instead of gains.
