6 Investments That Can Help Combat Inflation

With the consumer price index increasing during the last few years at a rate not seen for nearly 40 years, the investing challenge for the coming year is finding ways to generate real returns during exceptionally high inflation. Traditional inflation-resistant assets include real estate, commodities and consumer cyclical stocks. Others, such as travel, semiconductors and infrastructure-related investments, may perform well during this inflationary cycle due to specific circumstances tied to the pandemic. Cash, bonds and growth stocks, meanwhile, appear comparatively less attractive in today’s environment. A financial advisor can help answer your questions and make recommendations on how you should diversify your portfolio.

Inflation’s Ascent

According to Consumer Price Index data, throughout 2022, inflation rose by 8% monthly, on average, which is far and away the highest figure since 2000. While eased some during 2023, there are still a lot of categories that have high inflation in 2024.

Inflation erodes the purchasing power of cash and depresses returns on bonds. That poses a puzzle for investors aiming to protect their portfolios and stay on track toward their financial objectives. The pandemic’s economic impact provides some special challenges, as well as opportunities.

6 Inflation Investments for the Future

1. Equities

Equities generally offer a reliable haven during inflationary times. That’s because stocks historically tend to produce total returns that exceed inflation. And some stocks do better than others at fending off inflation. Equities of small-cap, dividend growth, consumer products, financial, energy and emerging markets companies are showing up on many recommended lists. Also getting the thumbs-up are industries experiencing post-pandemic rebounds, particularly, travel, leisure and hospitality.

2. Real Estate

Real estate is another tried-and-true inflationary hedge. Residential real estate, in particular, is generally seen as a safe haven. Home construction and building materials are also getting recommended as inflation-busters. Real estate investment trusts (REITs), public companies that own real estate or mortgages, offer a way to invest in real estate without actually buying properties.

3. Commodities (Non-Gold)

An investment in commodities can be one of the most powerful inflation hedges. Raw materials and agricultural products can be traded like securities. Commodities traders commonly buy and sell oil, natural gas, grain, beef and coffee, among others. Investors can direct portions of their portfolios into commodities using futures contracts and through investments in exchange-traded funds.

4. Treasury Inflation-Protected Securities (TIPS)

Another investment opportunity during inflation is Treasury inflation-protected securities (TIPS). These government-backed bonds increase in value as the CPI rises, eliminating inflation risk. The price of TIPS ramped up sharply along with the inflation in past years. In other words, these inflation hedges aren’t as tempting as they were a year ago.

5. Savings Bonds

Some inflation-avoiders are turning to savings bonds, which the U.S. Treasury sells directly to investors. These are typically considered safe investments because the value can’t decline, which makes them a stabilizing investment during inflation or other periods of uncertainty.

6. Gold

Many investors use gold as a hedge against inflation, especially if the nation’s currency is losing value. Gold, as a very real asset and a commodity we felt needed to be called out individually, tends to hold its value fairly well and can be a stabilizing investment during uncertain times for investors. This isn’t a perfect investment, of course, but it can be good to utilize as part of a diversified portfolio as inflation gets out of hand.

How Individual Situations Can Affect Your Inflation Investments

While many investors find these inflation hedges valuable additions to portfolios during inflationary eras, they aren’t always right for every investor. Individual goals, time horizons and risk tolerance should be considered before making any investment decision.

For instance, during normal inflation investors at or nearing retirement are generally advised to shift most of their portfolios into cash and fixed-income investments. The fact that inflation is on a roll doesn’t necessarily mean these risk-averse investors should go all in on equities, commodities and other relatively risky investments. Instead, they may put only modestly more of their portfolios into inflation hedges, while staying close to their asset allocation.

With interest rates still quite low, borrowing may be attractive for some investors. That’s especially true given that the Federal Reserve is likely to raise rates to combat inflation, making borrowing more expensive. With that in mind, taking out a mortgage now could be a smart move. This same is true of refinancing any existing high-interest rate loans. Keep in mind that inflation shrinks the balance due on a mortgage or other debt.

Bottom Line

As inflation rises faster than has been seen in many years, investors seeking to protect their portfolios are being advised to emphasize equities over fixed income while also considering exposure to real estate and commodities. REITs, commodities ETFs and shares of companies in sectors that were depressed during the pandemic, such as leisure and hospitality, may offer opportunities for growth that will more than counter inflation. Small-cap value stocks should also be considered.

Tips on Inflation Protection

Settling on an inflation hedge that fits your timeline and risk profile, is a challenge. A financial advisor’s insights and guidance can be helpful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Because inflation eats away at purchasing power, it’s good to have an estimate of how current inflation is affecting you. SmartAsset’s inflation calculator can quickly give you such an estimate.