How to invest during inflation: Strategies & assets to consider

Inflation is a normal aspect of a growing economy. But when it gets too high for comfort, it can start to clash with your everyday budgeting decisions. Inflation in the U.S. reached 9.1% in 2022, the most since 1981, and while it has toned down, it remains higher than normal in 2023.

Inflation doesn't just make trips to the store more expensive. It can complicate your investing decisions as well. While investing during inflation could open you to some risk, embracing certain assets and strategies could keep you on even footing.

Inflation is the general rise in the prices of goods and services over time. When prices rise, that decreases the purchasing power of money, and each dollar buys fewer goods and services. Put another way, the same goods and services cost more now than they did before.

This happens when an economy has too much money chasing after too few goods. In economics, this is described as the law of supply and demand. When consumer demand for goods and services is abnormally high, inflation typically rises at a faster pace than the historical average of 3.27%.

Inflation also can stem from an unusually low supply of goods and services, assuming the demand remains constant. When inflation rose to a 40-year high in 2022, supply-chain disruptions reduced the availability of goods, while consumer demand stayed high, unemployment was low and households generally had more cash to spend. This trend continued into 2023, as inflation ebbed but remained stubbornly above historical averages.

When faced with a climate of financial uncertainty, it can feel like the safest strategy is simply to save your money. But investing during inflation still has a place on the table.

Since inflation erodes your purchasing power, investing your money could help to prevent this by producing returns that match or exceed the average rate of inflation. That is the general goal of investing during inflation: to outpace the average rate of inflation over the long term. One generally acceptable inflation rate is around 2% or even a little lower. Certain types of investments will help you reach that goal better than others.

Considering the goal to outpace inflation over time, these types of investments could be worth exploring when prices are high:

Stocks have historically outpaced inflation—annualized returns have averaged about 10% historically. Hypothetically, say inflation runs above average—at 4% per year—for the next 20 years. Let's also assume your stock portfolio performs below average—at 8% per year—during that time. You're still doubling the rate of inflation, which means you're growing rather than shrinking your wealth.

Treasury inflation-protected securities (TIPS) tend to perform well despite inflation. These unique bond types are government securities designed to be indexed to inflation, as measured by the Consumer Price Index (CPI).

Real estate investment trusts (REITs) are companies that own and operate income-producing real estate. Property values and rental income often rise along with inflation.

During times of uncertainty and rising prices, investors have historically used gold as a hedge. Keep in mind, though, that while gold is generally a store of value over time, prices can fluctuate in the short term.

These are stocks of companies that sell items, such as health and food products, that people need even during times of economic difficulty. These investments are positioned to do better than stocks of companies selling non-essential products or services during inflationary periods. However, there's no guarantee they'll generate positive returns.

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Inflation hedges

Inflation doesn't have to equal a total spending freeze. You can employ certain strategies to hedge against inflation in your savings and investing decisions.

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As is always the case, investing involves risk. There are no guarantees—and investing during periods of inflation is no different. But with the right approach, you could help your finances outpace inflation over time.

Consider these strategies for protecting and growing your assets when inflation is eroding at purchasing power:

Diversification can help to reduce market risk during uncertain times. Because mutual funds are pooled investments that often hold dozens or hundreds of securities—stocks, bonds, cash or a combination of assets—in a single package, they can be smart diversification tools for any type of investor.

If your employer offers a 401(k) with matching contributions, be sure to take advantage of this opportunity. For example, if your employer offers a 50% match for contributions up to 6% of your salary, try to contribute at least 6% of your pay. This is like getting a 50% rate of return on your investment, which is more than 10 times the average rate of inflation.

When you make periodic purchases with a set dollar amount, such as monthly 401(k) or other retirement contributions, you buy more shares of investments when prices are low and fewer shares when prices are high. Over time, this can average out and reduce market risk compared with investing a singular lump sum amount. This is called dollar-cost averaging, which involves continuous investing. Therefore, investors should consider their long-term ability to make purchases through periods of low prices and varying economic periods.

Bond yields and interest rates for certificates of deposit (CDs) typically rise during inflation, allowing investors to reduce interest rate risk and take advantage of higher interest rates by purchasing CDs or bonds with differing maturities.

Periodically check that you have the right mix of investments to grow your money over time while minimizing short-term risk. You occasionally may need to rebalance your portfolio, which involves buying and selling securities to restore your mix of investments to your original target allocations. You can do this yourself or with a financial advisor, who also can assess your risk tolerance and financial goals.

Investing during high inflation means pinpointing the strategies that work for you and your family. As you begin implementing an investment strategy for inflation, consider reviewing your budget and working with a local Thrivent financial advisor to ensure your portfolio is prepared for the inevitable ebbs and flows of the economy.