6 Investments That Can Help Combat Inflation

With the consumer price index increasing during the last few years at a rate not seen for nearly 40 years, the investing challenge for the coming year is finding ways to generate real returns during exceptionally high inflation. Traditional inflation-resistant assets include real estate, commodities and consumer cyclical stocks. Others, such as travel, semiconductors and infrastructure-related investments, may perform well during this inflationary cycle due to specific circumstances tied to the pandemic. Cash, bonds and growth stocks, meanwhile, appear comparatively less attractive in today’s environment. Before you make your next allocation, consider these best investments for inflation that can help stabilize your portfolio during market volatility.

A financial advisor can help answer your questions and make recommendations on the best investments for inflation to diversify your portfolio.

Inflation’s Ascent

According to Consumer Price Index data, throughout 2022, inflation rose by an average of 8% monthly, which is far and away the highest figure since 2000. While it eased somewhat during 2023, there were still many categories with high inflation in 2024.

Inflation erodes the purchasing power of cash and depresses returns on bonds. That poses a puzzle for investors aiming to protect their portfolios and stay on track toward their financial objectives. The pandemic’s economic impact provides some special challenges, as well as opportunities.

6 Inflation Investments for the Future

To protect your portfolio from market volatility, these are the best investments for inflation.

1. Equities

Equities generally offer a reliable haven during periods of high inflation. This is because stocks historically tend to produce total returns that exceed inflation. 

Some stocks do better than others at fending off inflation. This includes equities of small-cap, dividend-growth, consumer products, financial, energy and emerging markets companies. Also recommended are industries experiencing post-pandemic rebounds, such as travel, leisure and hospitality.

2. Real Estate

Real estate is another tried-and-true inflationary hedge. Residential real estate, in particular, is generally seen as a safe haven. Home construction and building materials are also being recommended as inflation-busters. 

Real estate investment trusts (REITs), public companies that own real estate or mortgages, offer a way to invest in real estate without actually buying properties.

3. Commodities (Non-Gold)

An investment in commodities can be one of the most powerful inflation hedges. Raw materials and agricultural products can be traded like securities. Commodities traders commonly buy and sell oil, natural gas, grain, beef and coffee, among others. 

Investors can direct portions of their portfolios into commodities using futures contracts and through investments in exchange-traded funds (ETFs).

4. Treasury Inflation-Protected Securities (TIPS)

Another investment opportunity during inflation includes Treasury inflation-protected securities (TIPS). These government-backed bonds increase in value as the CPI rises, eliminating inflation risk. The price of TIPS ramped up sharply, along with inflation in past years. In other words, these inflation hedges are not as tempting as they were a year ago.

5. Savings Bonds

Some inflation-avoiders are turning to savings bonds, which the U.S. Treasury sells directly to investors. These are typically considered safe investments because the value cannot decline, making them a stabilizing investment during inflation or other periods of uncertainty.

6. Gold

Many investors use gold as a hedge against inflation, especially when the nation’s currency is losing value. Gold, as a physical asset, tends to hold its value fairly well and can be a stabilizing investment during uncertain times for investors. This investment is not without risk, but it can be good to utilize as part of a diversified portfolio as inflation gets out of hand.

How Individual Situations Can Affect Your Inflation Investments

While many investors find these inflation hedges valuable additions to portfolios during inflationary eras, they are not always right for every investor. Individual goals, time horizons and risk tolerance should be considered before making any investment decision.

For instance, during normal inflation, investors at or nearing retirement are generally advised to shift most of their portfolios into cash and fixed-income investments. The fact that inflation is on the rise does not necessarily mean risk-averse investors should go all in on equities, commodities and other relatively risky investments. Instead, they may allocate  only a modest amount of their portfolios into inflation hedges, while staying close to their asset allocation.

With interest rates still relatively low, borrowing may be an attractive option for some investors. That is especially true given that the Federal Reserve is likely to raise rates to combat inflation, making borrowing more expensive. 

With that in mind, taking out a mortgage now could be a smart move. The same is true of refinancing any existing loans with high interest rates. Keep in mind that inflation shrinks the balance due on a mortgage or other debt.

Tips for Building an Inflation-Resistant Portfolio

Building a portfolio that can withstand the pressures of inflation requires balancing risk, return and liquidity. The key is to include assets that historically outpace inflation — like stocks, real estate and commodities — while maintaining enough stability to ride out market volatility.

These practical tips can help you create an inflation-resistant portfolio. 

Diversify Across Asset Classes

Even during inflationary periods, diversification remains critical. Combining equities, real estate, commodities and fixed-income investments spreads risk and increases the likelihood that some parts of your portfolio will perform well even if others lag. Avoid concentrating too heavily on a single asset class — inflation affects different sectors in different ways.

Adjust Your Allocation Based on Risk Tolerance

Your ideal mix of inflation-resistant assets depends on your risk tolerance, investment horizon and goals. This is a look at how conservative, moderate and aggressive investors may allocate their portfolios during times of high inflation.

Include Inflation-Linked Assets

TIPS, REITs and certain commodities ETFs can serve as a buffer when inflation spikes. These assets tend to retain or grow their value as prices rise.

Maintain Some Liquidity

While combating inflation is important, keeping some cash or liquid investments available ensures you can cover unexpected expenses or take advantage of market opportunities without having to sell at a loss.

Bottom Line

As inflation rises faster than it has in many years, investors seeking to protect their portfolios are being advised to emphasize equities over fixed income while also considering exposure to real estate and commodities. REITs, commodities ETFs and shares of companies in sectors that were depressed during the pandemic, such as leisure and hospitality, may offer opportunities for growth that will more than counter inflation. Small-cap value stocks should also be considered among the best investments for inflation.

Work with a financial advisor to create the right asset allocation for your portfolio based on your long-term goals, time horizon and risk tolerance. 

Tips on Inflation Protection

• Settling on an inflation hedge that fits your timeline and risk profile, is a challenge. A financial advisor’s insights and guidance can be helpful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Because inflation eats away at purchasing power, it’s good to have an estimate of how current inflation is affecting you. SmartAsset’s inflation calculator can quickly give you such an estimate.

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