What to Invest in During High Inflation

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While the specter of high inflation hasn’t haunted US consumers to the extent witnessed in 2022, inflation has remained persistent in 2024. The Consumer Price Index barely budged, rising by a mere 3.4% in April, down just slightly from March’s 3.5%. Even though inflation might exhibit a slow downward trend, investors would be wise to fortify their portfolios against its erosive effects. After all, inflation doesn’t merely impact current spending but also nibbles away at investment returns and diminishes wealth over time.

Navigating High Inflation: Investment Strategies

Christine Benz of Morningstar suggests a nuanced approach tailored to different investor profiles. Younger investors might lean towards maintaining substantial exposure to stocks, while retirees and those nearing retirement may seek refuge in inflation-protected fixed-income assets. Some investors might even consider cash as a hedge against inflation.

Here’s a breakdown of investment options to consider amid high inflation:

Inflation Bonds: Investing in inflation bonds, commonly known as I bonds, presents a direct hedge against inflation. These Treasury bonds yield monthly interest comprising a fixed rate and inflation-adjusted rate, recalibrated semi-annually. While attractive, I bonds have limitations, notably a $10,000 per year purchase cap and liquidity concerns due to limited payout options.
Mutual Funds and ETFs: Morningstar analysts favor Treasury Inflation-Protected Securities (TIPS) and commodities funds as effective inflation hedges. TIPS funds adjust in value in tandem with inflation fluctuations, albeit with lower yields compared to I bonds. Commodities funds capture price spikes preceding inflation hikes, but their volatility necessitates cautious positioning.

Some recommended TIPS and commodities funds include:

Vanguard Short-Term Inflation-Protected Securities Index (VTAPX)
Schwab U.S. TIPS ETF (SCHP)
Pimco CommoditiesPLUS Strategy (PCLIX)

Gold Investment: Despite gold’s historical allure as an inflation hedge, its reliability remains uncertain. The sporadic nature of gold returns and the inability to predict its future value make it a less dependable option for consistent inflation protection.
Equities: While equities may not offer immediate inflation protection, they often exhibit resilience over the long term. Companies with pricing power to offset rising costs and those less reliant on raw materials can weather inflationary pressures. Morningstar analysts recommend high-quality stocks trading at discounted prices and offering stable dividends, such as Duke Energy, Pfizer, and Verizon Communications.

Investing Strategically Amidst High Inflation

Recognizing that there’s no one-size-fits-all approach to inflation hedging, investors should weigh various strategies based on their risk tolerance and portfolio composition. While some may explore leveraging real estate investments to offset inflation, others may adjust asset allocations or implement inflation-hedging tactics within bond-heavy portfolios.

Ultimately, a holistic portfolio construction approach, considering diverse risks and specific investment objectives, fosters more resilient outcomes. As Russ Kinnel underscores, while guarding against inflation is essential, it shouldn’t overshadow broader portfolio considerations.