3 Investments To Consider During Times Of Inflation

For inflation that was supposed to be temporary, the surge in consumer prices doesn’t look to be going away anytime soon. That can have profound effects not only on your budget today — you’re reminded every time you buy groceries or fill up at the pump — but also on the money you’ve set aside for more long-term needs.

As of January, the consumer price index rose at a staggering 7.5% annual rate, the biggest 12-month jump since 1982. If you’re not investing in assets that can keep up, you’re in effect losing money right now.

Does that mean it’s time for a massive overhaul of your investment strategy? Probably not. In times like this, it’s important to take the long view, especially if you’re a younger investor, suggests Dan Herron, an advisor with Elemental Wealth Advisors in San Luis Obispo, California. “We typically make minimum changes to portfolios based on short-term changes in the market,” he says.

However, some investments are able to handle inflation better than others — and cash isn’t one of them. So if you have more dollars sitting in your bank account than you need, here’s where you might be able to put them to better use.

1. Stocks

Stocks might not represent a flashy investment. But during times of high inflation, this bread-and-butter choice has one of the best chances of keeping up. Despite a recent cooling-off, the S&P 500 is still up more than 10% over the past 12 months, precisely when consumer prices have surged.

If history is any guide, value stocks — companies that are trading below what their performance would suggest — could be poised for a nice run. In the past, this sector has outperformed the broader stock market during periods when inflation levels off at a rate higher than the average, according to a recent analysis by Fidelity.

Over the past several years, growth stocks — ones expected to grow profits faster than the market — have been the real stars. That means value stocks may be, well, under-valued right now; currently, they comprise only 18% of the value of all U.S. stocks, according to Fidelity. If your portfolio is skewed toward growth companies, now may be a good time to rebalance.

2. TIPS and I-Bonds

Stocks tend to help counteract inflation over the long haul, but they can also be volatile in the short run. Treasury Inflation-Protected Securities, or TIPS, are government bonds that may be attractive for more conservative investors.

TIPS, which you can buy directly from the Treasury or through a brokerage, make interest payments twice a year at the stated rate. What makes them unique is that your principal increases when inflation does, allowing your investment to keep pace. For older investors that lean more heavily on fixed-income securities, Herron says TIPS held in a tax-deferred account can be a good way to make sure that inflation doesn’t eat away at their portfolio.

But it’s important to understand how these securities work. TIPS usually sell at a premium (above face value) when investors see inflation on the horizon. In other words, the market is banking on those principal adjustments. So they typically provide a better return than other Treasury bonds only when inflation is higher than expected, says Mark Struthers of Twin Cities-based Sona Wealth.

Another Treasury offering you may want to look at: Series I Savings Bonds. While they offer inflation protection as well, they’re a very different animal than TIPS. Rather than adjusting your principal value, I-Bonds pay a fixed rate of return plus an additional rate based on inflation. That inflation rate adjustment is made twice a year, based on the CPI.

And you don’t pay a premium when the price index shoots up — they sell at par value. “With I-Bonds, you actually get the return of inflation every six months,” says Struthers. Currently, they’re providing a combined rate of 7.12%, a payout that’s hard to overlook on an ultra-safe, government-backed bond.

Still, I-Bonds aren’t without their limitations. For one, they’re not an income-generating vehicle in the short run. “The interest gets added to the principal, and you receive it once the bonds mature,” says Herron.

Unlike TIPS, there’s no secondary market for I-Bonds, and you have to wait a year to redeem them from the Treasury. And if you do so after a holding period of less than five years, you’ll have to pay a penalty of three months’ interest.

For that reason, Herron sees them as a better option for longer-term investors. But keep in mind that you’re limited to buying $10,000 in a given year. “If you have a large portfolio, this may not be as impactful as someone who has a smaller one,” he says.

3. Real Estate

With property values jumping at double-digit rates year-over-year, having a slice of your portfolio in real estate can be a smart play right now. Certainly, owning investment homes is a way to do that, although it requires a sizable investment.

A strategy that’s more attainable for many investors: buying into real estate investment trusts, or RETIs. REITs are basically companies that own a basket of properties, from apartments to offices to health care facilities.

If the REIT owns property, it collects rental income on its portfolio of holdings; mortgage REITs finance properties rather than owning them and generate income by collecting interest payments. By law, they have to pass along at least 90% of their taxable profits in the form of dividends, making them a potential source of income for the investor.

Real estate costs, of course, are one of the key drivers of inflation. And when prices skyrocket like they’ve done recently, these companies can typically increase their rents to keep up.

Herron likes the Vanguard Real Estate Index Fund ETF (NYSE: VNQ), in particular, because of its relatively low fees and diversification across the sector. Although future results are impossible to predict, the fund’s nearly 29% return over the past 12 months represented a very good year, indeed.