Choosing the Best Investments for Inflation

Choosing the Best Investments for Inflation

by Jason Dittberner, AWMA®

December 3, 2021

Retirement Planning

When it comes to investing, there are things you can control and things you cannot. Your savings rate, risk tolerance, and time horizon are things that you can alter if your situation changes. But market returns, taxes, and economic factors like inflation? Those factors are beyond your control. You can’t prevent a bear market, a tax bill, or a rise in inflation, but you can prepare for them in an attempt to soften the blow. 

In today’s investment landscape, inflation is one of the primary concerns. Even if rises in the rate of inflation prove transitory as the Federal Reserve predicts, higher prices will likely be around for quite a while.

And even if the rate of inflation settles back to traditional levels, the result probably won’t be deflation, but disinflation where prices still move higher, but at a slower rate. Preparing your portfolio for a high inflation environment may be a prudent move, however, you don’t want to make drastic changes. Today, we’ll look at a few assets that may outperform should inflation persist longer than initially anticipated.

How Does Inflation Work?

Inflation is an aggregate increase in prices over a period of time. The Federal Reserve aims for a 2% rate of inflation, meaning that the average cost of goods and services should increase by 2% annually. 

An item that costs $1 this year will cost $1.02 the next year- should the 2% rate of inflation hold steady. A steady, consistent rate of inflation is thought by many economists to be the price paid for a growing economy. 

Deflation (a decline in prices) would cause massive strife in the economy as debts compound but too much inflation puts many items and services out of reach for ordinary people.

Arizona has been hit harder by rising costs compared to other parts of the country. Nationwide, prices are up by 4.5% over the past year, and in Arizona, prices have increased to almost 5%.  Those who do not have a financial advisor now may want to start looking for the best fit. 

In Phoenix alone, there are over 2100 financial advisors. Sorting out their fee structures, expertise and years of experience is a task. But it’s well worth the time when it comes to being prepared for your financial future. 

Inflation affects everyone in different ways. If you have fixed-rate debt and a low salary, inflation may boost your wages while decreasing the dollar value of your debt. That’s good!  

For retirees and those on a fixed income, inflation represents a permanent loss of earnings. 

Inflation eats away at the returns provided by savings accounts and fixed income securities. When Social Security loses its buying power, retirees are forced to reconsider their retirement income strategies. A good financial advisor can help navigate retirees through potential high inflation, low-interest rates, and an uncertain market.  

Since inflation is usually fought by raising interest rates, portfolios filled with income-producing assets like bonds can suffer as newly-issued bonds decrease the value of the bonds issued previously. Predicting inflation is a perilous endeavor, too. Many investors thought inflation would run rampant following the monetary response to the 2008 recession, but such fears never future materialized. 

Today, inflation is elevated, and where it goes from here is uncertain. Will supply chain issues hinder the re-opening of the economy? Will government spending continue to accelerate demand? And will households continue to spend as the stimulus runs out? 

If you know the answers to these questions, you probably stopped reading this article after the first few paragraphs. But if you want to move your portfolio to a more defensive position without sacrificing too much upside, consider the following assets.

Investments for A High Inflation Environment

The best way to combat inflation on a personal level is to hold assets that increase in value faster than the rate of inflation. Savings accounts and FDIC-insured vehicles like certificates of deposit aren’t going to fit that bill. You may need to adjust your risk profile, but if inflation continues to rise at these rates, you may want to consider the following three assets:

  • Stocks: One of the hedges against inflation is an asset class you’re likely deep into already. Stocks have consistently provided returns above the pace of inflation for several decades now and they remain one of the best sources of purchasing power protection for capital. Consider sectors where demand is inelastic despite a rise in prices, such as consumer staples or large retailers.
  • Real Estate: Another defense against inflation might simply be owning a home with a fixed-rate mortgage. A fixed-rate mortgage is a good type of debt to have in a high inflation environment since your obligation remains the same despite the loss of purchasing power.

    If your take-home pay increases (even if it’s only equal to the rate of inflation), the percentage of your salary that goes toward housing costs will decrease. Plus, you own a tangible asset that will increase in value over time. Homeownership is a  core tenet of the American dream for a reason and there are few better places to park some cash during periods of high inflation than an affordable home.

Uncertain Future

“Now more than ever”. It’s a phrase we’ve been hearing for over a year and a half. Covid-19 has left a profound effect on our lives and on the market. It could take a good amount of time to recover.  It’s so important to have a good support system, including a financial advisor to help you to invest wisely and develop a solid retirement plan that will help you overcome financial turbulence like inflation. 



Ascendant Financial Solutions, Inc. is an independent SEC Registered Investment Advisory firm serving clients in the Flagstaff and Phoenix, Arizona areas. With more than thirty years of experience in the financial industry, we partner with families, business owners, and retirees to ascend to greater financial heights on their journey to financial freedom. No matter how complex your financial goals are, our team will rise to the challenge to help you meet your goal. 

Author: Jason Dittberner, AWMA®