Exploring inflation’s impact on your investments

Investing is always a balancing act, where you work to find the right formula for your financial goals, risk tolerance and time horizon. Add high inflation to the mix, and it's understandable if that delicate equation gets thrown off balance.

Inflation has been higher than normal lately. In 2022, inflation reached 9.1%, a 40-year high, and consumer prices remain above average in 2023.

Still, there's reason to remain optimistic. You can control elements of investing, including the types of assets you put your money behind. Let's explore how inflation affects certain assets and how that could impact your investment decisions.

In the long run, low-to-moderate inflation can be a natural part of the economy, and the prices of investment assets can rise along with goods and services. But in an environment of high inflation, some assets feel the impact more readily.

While stocks are generally good investments for fighting inflation over time, high inflation can negatively affect stocks. For this reason, stock prices tend to be volatile during periods of high inflation. This is because stock prices are largely based on investor expectations of a company's future earnings, and extreme inflation can make it difficult to gauge that.

For example, companies with high levels of debt may be worse off during inflation because higher borrowing costs can reduce their bottom-line profit. Businesses with stronger cash-flow situations can sometimes fare better during inflation. Because of this, growth stocks tend to suffer more than value stocks during inflation but may recover more quickly when inflation ebbs.

In the first half of 2022, the stock market, as measured by the S&P 500 index, fell by more than 20%. This officially made it a bear market. Growth stocks, as measured by NASDAQ 100 index, fell by more than 30%. However, in 2023, as inflation dipped below the highs of 2022, growth stocks began to outperform the broader market. This underscores the importance of diversification and a long-term outlook during challenging economic times.

• Read more: How does inflation affect stocks?

Because higher interest rates generally accompany higher inflation, an inflationary environment can have a negative effect on fixed-income securities, such as bonds and mutual funds invested in bonds. This is because bond prices tend to move in the opposite direction of interest rates.

Some bonds and bond funds are affected more than others during periods of high inflation and rising interest rates. Typically, the longer the duration of the bond, the greater the interest rate sensitivity. As a result, long-term bonds and bond mutual funds generally will suffer greater price declines than short-term bonds during high inflation.

• Read more: Bonds & inflation: What you need to know

Treasury inflation-protected securities (TIPS) can be a good investment choice to protect against high inflation. These particular Treasury bonds are linked to the Consumer Price Index, which means they adjust payments upward when inflation rises, while other types of bonds don't. Keep in mind, however, that falling inflation can have the opposite effect and reduce the value of TIPS.

Inflation affects real estate primarily because of rising interest rates. When interest rates are rising, the prices for some asset classes, such as certain stocks and bonds, tend to fall. However, real estate is an asset class that can perform relatively well during inflationary, rising-rate environments.

Income-generating residential and industrial real estate sectors tend to do well during inflation. Growth in these areas can outpace inflation because of growing demand and rent increases.

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Inflation hedges

With your family's financial health in mind, you may be looking for ways to offset the current effects of inflation and hedge against future price hikes. You're not alone. Get a look at how to hedge against inflation using assets that can offset the negative impacts of higher consumer costs, rising rates and a slowing economy.

Dive deeper

Your first thought might be to keep your money in cash to sidestep investment losses during times of high inflation. But savings accounts also can take a hit during inflationary times. People with low-interest savings accounts, money market funds and certificates of deposit (CDs) can be hurt by inflation because it cuts purchasing power. More specifically, if the interest rate for your savings account is lower than the rate of inflation, you are effectively losing money over time.

Plus, higher inflation may mean you're not able to put as much money into savings or that you need to draw from your savings accounts to keep up with the rising costs of goods and services.

One way to approach investing during inflation is to diversify your portfolio. Through diversification, you can potentially reduce market risk by spreading your money across different asset types. For example, you can increase exposure to investment assets, such as TIPS and real estate, which can be good inflation hedges.

You also may reduce exposure to other investments, such as growth stocks and long-term bonds, which typically don't perform well during periods of high inflation.

To summarize, consider these examples of potential inflation hedges:

• TIPS
• Real estate
• Value stocks
• Commodities
• Series I bonds

And aim to lighten these investments during high inflation:

• Growth stocks
• Long-term bonds

Inflation is part of any economy, but periods of particularly high inflation are a good opportunity to rethink how you're diversifying your portfolio and how to strengthen your household finances.

A trusted financial professional can help you feel more confident about your decisions during uncertain times. They can review how inflation may affect your investments and help you tweak your financial strategy accordingly. With the help of a local Thrivent financial advisor, you can learn which inflation hedges are right for you, chart a clear path forward and stay focused on your goals.