U.S. Federal Reserve building
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Best Investments to Protect Your Portfolio as Inflation Hits New High

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Apr. 13 2022, Updated 9:30 a.m. ET

Inflation occurs when the prices of goods and services in an economy rise over a period of time. Using a price index like the CPI (Consumer Price Index) or the PPI (Producers Price Index), inflation is measured by calculating the percentage change from one period to the next.

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U.S. inflation has been running above comfort levels for many months and hit 8.5 percent in March. That's the highest level of inflation since 1982, and the first time in four decades that inflation has crossed 8 percent. Even the Federal Reserve, which initially called inflation "transitory," has now embarked on rate hikes. The Biden administration has also warned that higher prices might stay for some time. What are the best investments in an inflationary environment that can help protect your portfolio from losing value?

Inflation impacts investment returns.

Inflation is described as the worst form of taxation because it impacts both the rich and the poor. When it comes to investments, inflation reduces the real rate of return, which is simply the total returns minus inflation. One of the key investment objectives is to generate returns that exceed inflation. Higher inflation makes the job even tougher.

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Some asset classes generally do well in an inflationary environment. Similarly, some investments don't do well when inflation is high. It's important to restructure your portfolio when the price rise looks sticky.

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Why is inflation so high in 2022?

Inflation has been running high for months now in the U.S. as well as globally. The global supply chain got wrecked amid the COVID-19 pandemic. Factories couldn't resume production fast enough to satiate the rebound in demand. Then we had the labor and driver shortage, which also impacted the supply chains.

Rising commodity prices, especially that of oil and gas, have also played havoc with inflation. Crude oil prices jumped to their highest level since 2008 after Russia invaded Ukraine.

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Gold is a hedge against inflation.

For decades, gold has been relied upon as a hedge against inflation. As a real and physical asset, gold tends to hold its value. Gold is also a hedge against growing geopolitical tensions.

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Gold isn't the perfect cushion against inflation. When inflation rises, interest rates tend to increase as part of the overall monetary policy. Holding onto gold, which doesn't pay yields, might not be as valuable as holding onto other assets that pay yields. However, broadly speaking gold is one asset class that you can invest in now considering the macroeconomic and geopolitical scenario.

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Commodities are an option.

Commodities are an overarching category of real materials and agriculture products. Seemingly ordinary, everyday goods, commodities can shield investors from high inflation.

The relationship between commodities and inflation is somewhat correlated. When commodity prices rise, so does inflation. Oil and gas prices are typically high in an inflationary environment. Wheat prices also spiked after Russia invaded Ukraine. Amid a shortage of food products, investing in agricultural commodities might be a good idea.

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us wheat production
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The good news for investors is that it’s pretty easy to gain exposure to diverse commodities assets via ETFs or through buying stocks in companies that produce commodities.

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Real estate income can help you tide over high inflation.

Investing in real estate that can provide you with rental income is another good avenue to invest in during high inflation. Property prices and rentals usually rise in an inflationary environment.

Also, as mortgage rates are rising, housing affordability might come down which could mean higher demand for rented accommodations.

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us real estate
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TIPS are indexed to inflation.

TIPS (Treasury inflation-protected securities) are a type of U.S. Treasury bond. TIPS are indexed to inflation to protect investors from inflation. TIPS payout semiannually at a fixed rate. The principal value of TIPS changes based on inflation. Therefore, the rate of return includes the adjusted principal. Investors can choose between three maturities rates—five-year, 10-year, and 30-year.

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Value stocks can do well in high inflation.

When inflation is high, value stocks can do well while growth stocks underperform. Jim Cramer has also advised investors to pivot from most FAANG stocks, a term that he coined, to value stocks. However, billionaire investor Ron Baron believes that growth stocks can help protect against high inflation.

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Stocks of commodity companies tend to do well in high inflation. Large retailers like Walmart can also do well in high inflation. Companies with pricing power are well placed in an inflationary environment.

Should you invest in bonds during high inflation?

Bond prices have a negative correlation with interest rates. Long-duration bonds have fallen as the Federal Reserve has had to increase rates to counter inflation. However, investing in short-duration bonds can be a good investment option during periods of high inflation.

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