The Impact of Inflation on Investments – How to Protect Your Portfolio

The Impact of Inflation on Investments – How to Protect Your Portfolio

Inflation reduces your purchasing power of investments, so to combat it you should seek investments with potential returns that exceed inflation.

Consider investing in stocks of companies producing essential goods or services, such as utilities or food. Also, allocate some capital towards real estate.

Long-term fixed-income investments

While inflation may appear harmless at first, prolonged high inflation can have detrimental consequences to your wealth and purchasing power. High inflation can erode long-term investments such as corporate and municipal bonds, treasuries and CDs while diminishing cash alternatives like savings accounts and money market funds.

Inflation reduces your purchasing power, so it’s crucial that investors consider inflation-adjusted returns when making investment decisions. For example, if your portfolio earns a return of 5% while inflation stands at 4%, its real return would actually be negative – so we recommend creating a portfolio with potential returns that exceed inflation’s rate. In particular, we believe value stocks and international equities tend to perform well during periods of rising inflationary environments, providing lower volatility with greater diversification potential than bonds or domestic stocks during periods when inflationary environments accelerate.

Short-term fixed-income investments

Even as the value of the dollar declines, you can still generate a decent return by diversifying your portfolio with assets that perform well during inflationary times – for instance treasury inflation-protected securities (TIPS) offer great protection as their payments rise with inflation.

Stocks can often be an ideal investment option in times of high inflation as company revenues and earnings tend to track inflation rates closely, and some stocks offer price-to-book ratios which make them appealing when inflation levels soar.

Money market accounts offer another suitable investment option during periods of inflationary trends as their rates often fluctuate and adjust upwards automatically as interest rates rise. Furthermore, retirees may receive inflation-adjusted income through Social Security or annuities with cost-of-living adjustments; however, many don’t enjoy such advantages with respect to the portion of their portfolio they use to cover ongoing living expenses.


Long-term investors may benefit from investing in stocks with an established track record of outperforming inflation, such as companies with pricing power that can pass along higher costs to consumers over time. Value stocks – typically shares of companies with lower valuations than their current trading price – also tend to do well during times of high inflation.

Inflation is an essential economic concept. It informs investors on the returns that are necessary to maintain a certain standard of living through investments, while at the same time helping identify areas in which purchasing power has diminished over time.

Many investors fear investing in an inflationary environment, yet with the appropriate approach you can protect your family’s financial health and achieve your financial goals. Understanding inflation’s effect on investments and how wise decisions can help shield their savings can provide some comfort during an inflationary cycle.

Cash alternatives

As inflation threatens savings and investment plans, there are steps you can take to mitigate its effects. Instead of locking away cash in certificates of deposit (CDs) which only offer nominal returns, you might consider investing it elsewhere for real returns that help preserve purchasing power of your savings and investments.

Equities (stocks) often offer returns that outpace inflation, while also representing ownership of a company, providing access to future profits and growth, along with voting rights that allow you to participate in decision-making processes.

Additionally, investing in commodities or publicly-traded real estate could diversify your portfolio and increase return potential during inflationary markets. This is because natural resources tend to rise with inflationary costs, offsetting some of its effects. Furthermore, such investments tend to be less volatile than traditional bonds and offer opportunities for rent payments or capital appreciation.

Preston Tate

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