Investing wisely during high inflation

Investing wisely during high inflation

We’ve been hearing one question over and over again in the past few weeks: “How will my investments be affected if inflation kicks in?” We’re glad you asked, because we’ve been training for this!

Just like we wrote in our “How To Choose Faith Over Financial FOMO” post, when you start hearing scary stories about inflation in the news, take a deep breath, trust in our time-tested financial principles you’ve been following, and stay the course. We’ve been addressing the effects of inflation within our portfolios for years! We’ll explain how below. 

But first, what exactly is inflation? Inflation is simply when prices go up but the value of your money stays the same. Inflation is caused by a few things: 

  1. Prices go up when there’s more demand than supply (“demand-pull inflation”).
  2. The cost of making things goes up with wage increases and material costs (“cost-push inflation”). 
  3. Inflation can become a self-fulfilling prophecy: We  expect inflation to happen every year, so we raise prices and wages regularly accordingly (“built-in inflation”). 

Inflation isn’t necessarily a bad thing. It’s why you can reasonably expect things like real estate to rise in value over time, and healthy levels of inflation keep economies chugging right along. (It also gives people all those entertaining stories about how, back in my day, a movie ticket cost just $2.50! Or 25 cents…depending on when you were born.) 

As long as you’re prepared for some inflation rate changes (and if you’re working with us, you are), you don’t have to worry as much. Remember when the Great Recession rocked everyone’s world in 2008 and interest rates plummeted? They did it again in 2020 with the COVID crisis! We’ve been used to very low rates for a while now, so of course there’s some sticker shock when inflation starts to rise a little. But it’s only when economies face hyperinflation — rates above 50% a month — that things go really sideways. 

That is not what is happening now. 

When we create your plan, we build in an assumption of 3 percent annual inflation. (The U.S. government aims to keep inflation around 2 percent.) Yes, the Consumer Price Index (CPI), which is the number people are talking about when they talk about “inflation,” hit 5.4% in July, but it’s already beginning to tick back down again. 

These increases are to be expected, especially as we’re continuing to ride pandemic waves and the government is spending more money. We want to include “hedges” against higher inflation rates in your portfolio…without leaning so far into those precautions that you miss out on other things. Changes in inflation rates aren’t something to be scared of, but they are something to anticipate and approach with wisdom. 

Knowing your cash and bonds will lose some buying power when prices go up, we want to make sure your diversified financial portfolio includes some pieces that can float with the CPI and/or do a little better when inflation rates rise. Here are some of the ingredients we use to help our portfolios weather inflation upticks: 

  • Real Estate: Both “physical” real estate and “paper” real estate (using ETF’s) should reflect the rises in property values and rents that come with inflation.
  • Commodities: Commodity prices for raw materials should rise along with inflation. We used to include a broad-basket commodity fund in our portfolios, but found them offering lackluster results most of the time. So instead, we keep a small allocation toward precious metals investments, which allows for a nice hedge against inflation. We don’t recommend trading in all your stocks for the generally more risky commodity funds — keep your wits about you and stick to your plan! Which brings me to… 
  • Stocks: A diversified investment plan (remember the investment asset performance quilt?) should continue to perform well in the long-term. Consumer staples, utilities, and value stocks usually fare better during inflation upswings, so having some of those in your pocket can help. Again, just don’t go overboard trying to adjust for today’s inflation rate — you’ll lose out when things shift the other direction. 
  • Short-term Bonds: Short-term bonds are not very exciting, but tend to perform better than longer term bonds during inflationary times. 
  • TIPS: Treasury Inflation Protected Securities (TIPS) are literally tied to the CPI — they are the only assets guaranteed to rise along with inflation rates. Just remember that long-term, they’ll lose value when inflation rates drop. We have used these in an ETF format for several years. 
  • I Bonds: As we’ll be covering in a future post, Series I Savings Bonds combine a fixed rate and a biannual inflation rate, which makes it a low-risk bond during times of higher inflation. There are some twists to this bond, so talk to us if you’re interested in taking advantage of this particular investment; we’ll walk you through its quirks. 

In conclusion, the short answer for “How do I invest during high inflation,” is: You are already doing what you need to be doing. You have a diversified portfolio peppered with inflation-sensitive ingredients and you’re following the Sound Stewardship Principles for long-term financial success. In addition, you’re trusting in God’s provision, not getting scared of the inflation headlines. We’ve got this! 


Want to develop your financial confidence and contentment? Talk to one of our advisors to learn how Sound Stewardship can help.

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