What The Experts Say About Portfolio Allocation During High Inflation

Alpesh Patel
Oct 27, 2022
3 min read

Updated: Nov 15, 2023

It's no secret that inflation can significantly impact your portfolio. During times of high inflation, it can be difficult to maintain your original allocation and protect your investments.

We will look at what some experts say about portfolio allocation during high inflation. We will also explore the options available to you, such as hedge funds, stocks, and ETFs.

What is the impact of inflation on investments?

Inflation is the general increase in prices and a fall in money's purchasing power. It occurs when the cost of living goes up, and your money goes farther than it used to.

Investments are not immune to inflation. In fact, they can be a crucial driver of inflation. When the price of goods and services increases, so does the cost of production. This often leads to wage increases, which then drives up the cost of living even further.

Investors must be mindful of how inflation will impact their portfolios. If an investment cannot keep up with inflation, it will lose value over time. This is why it's important to have a diversified portfolio that includes investments that can protect against inflation.

The best ways to hedge against inflation

There are several ways to hedge against inflation. Here are some of the most popular methods:

Invest in Treasury Inflation-Protected Securities (TIPS)

TIPS are bonds issued by the government that protects against inflation. These bonds' principal and interest payments adjust with the inflation rate to keep pace with rising prices.

The major downside of TIPS is that they tend to have lower interest rates than other types of bonds. This means that you may not earn as much in interest payments, but you will be protected against inflation.

Invest in commodities

Commodities are natural resources that can be used to produce goods and services. They include things like oil, gold, silver, and copper. Commodities tend to do well when inflation is high because they become more expensive as the cost of producing them goes up.

However, commodities can be very volatile, so they should only make up a small part of your portfolio. You can invest in commodities directly by buying futures contracts or mutual funds that invest in them.

Invest in EFTs

EFTs are investments that track an underlying index, such as the S&P 500. They are similar to mutual funds but trade like stocks on an exchange.

Inflation-protected EFTs are a good choice for investors who want to protect their portfolios from inflation. These EFTs invest in assets that are not affected by inflation, such as government bonds.

Build a MOAT

In investment terms, a moat is a sustainable competitive advantage that a company has over its rivals. A wide moat means the company can maintain its market share and profitability even in tough economic conditions.

Some companies have built-in moats that protect them from inflation. For example, companies with high barriers to entry, such as utilities, tend to do well during periods of high inflation. This is because it is difficult for new entrants to compete with established companies.

Diversify your portfolio

One of the best ways to protect your portfolio from inflation is to diversify your investments. This means investing in a variety of assets, such as stocks, bonds, and commodities. By diversifying, you can reduce the risk of losses if one asset class performs poorly.