How to Invest During Inflation (and Why It’s Important)

You’ve felt it at the grocery store, at the gas pump, and even as you’ve been planning for your summer vacation (the nerve). That’s right, we’re talking about inflation. Despite persistent fears over the rise of inflation, it’s important to know there are strategies to help preserve your portfolio’s value when inflation is high, one of which being portfolio diversification.

So, today we’re going to walk you through what inflation is, how to invest during inflation, how to avoid common pitfalls when the market is down, and how to protect your assets from inflation’s effects.

What Is Inflation and What Causes It?

It’s no secret that prices for consumer goods have dramatically increased over the past year. Inflation in the U.S. is at its highest level in more than four decades. And Americans are feeling its effects. According to a new Pew Research Center survey, 70% of Americans view inflation as a very large problem in the U.S. right now, much higher than any other issue.

A new report by the U.S. Bureau of Labor Statistics demonstrated a pause in U.S. inflation last month. The annual consumer price index (CPI) inflation declined from 8.5% in March to 8.3% in April, which provided a slight sense of relief to consumers. Still, experts caution consumers from celebrating and instead suggest it’s too soon to know where inflation will go from here.

This begs the question: What exactly is inflation? Inflation occurs when the price of goods and services increases while the value of a currency decreases, ultimately decreasing consumer purchasing power.

Many factors cause inflation. Supply chain issues, high demand, and production costs are just a few. Inflation is likely one of the residual effects of the pandemic, which drove up the demand for products while the supply chain remained stifled due to lockdowns and labor shortages, among other things.

Why It’s Important to Invest During Inflation

While hanging onto every penny can be tempting during bouts of high inflation, it’s important to understand just how much money you’re losing when your money is sitting in a checking or savings account. Inflation’s effects are on full display at the grocery store and car dealership, but your currency’s declining value is often less obvious.

For example, if you’re utilizing a high-yield savings account with a 1% APR (which is at the high end), you may be thinking you’re coming out 1% richer, but in reality, you’re coming out 7.3% poorer due to inflation.

Emergency funds are important, but most financial experts recommend only keeping between three to six months’ worth of expenses in an accessible savings account. If you’re curious, here’s a calculator to estimate how much you should have in your emergency fund. If you want to protect the value of your money, then investing may be the way to go.

It’s important to note that the S&P 500 index, Nasdaq, crypto, and even bonds, which have historically fared well during times of market tension, are all down this year. Keeping your eye on your long-term goals is vital, especially during periods of high inflation, and portfolio diversification is key to preserving the value of your assets.

How to Protect Your Investments From Inflation’s Effects

The benefit of a diversified portfolio during times of high inflation and market volatility is that it reduces the risk that one asset class’s decline will tank your overall portfolio. Some assets are closely correlated with the S&P 500, while others are less correlated with some even moving opposite during times of market volatility. Here are some of the investments that have historically performed well during past periods of high inflation:

TIPS

TIPS, which stands for Treasury-Inflation Protected Securities, are backed by the U.S. government and are adjusted for inflation semiannually. Though considered low-risk, they can be less useful when inflation is low.

Commodities

Commodities are a popular choice when inflation is high because they are tangible assets that are likely to rise in value alongside inflation. Commodities include raw materials like energy, metals, and wheat. You can either directly purchase commodities, buy shares in a company that produces commodities, or buy shares in an ETF that specializes in commodities.

Alternative Investments

Many ultra-wealthy institutional investors choose alternative assets due to their potential for outsized returns. In the past, everyday investors didn’t have access to alternative investments. But not anymore. Now, everyday investors can invest in assets like real estate, securitized art, fine wine, and farmland, which have historically been less correlated with the S&P 500.

The Top 3 Mistakes Investors Make During Periods of Inflationary Pressure or Market Downturns

There are a few common mistakes that people make during times of high inflation and market volatility. Here are the top three mistakes people make when inflation is high and markets are low:

1. They constantly check their portfolio.

Watching your portfolio decrease in value can elicit an emotional response, especially for new investors. During times of market volatility and high inflation, it’s important to remember that volatility is the nature of the business, and maintaining a long-term vision, rather than getting wrapped up in the short-term fluctuations, is the way to go. Turn off that phone and go for a hike!

2. They panic and sell everything.

While difficult, avoiding panic selling will often lead to a recovery period. It’s best to remain calm and stay the course because, historically speaking, the market has always recovered. (This is not always true of individual stocks, though.) The caveat here is that staying the course is the right move when your investing strategy is wise and your portfolio is diverse.

3. They keep all their money in a checking or savings account.

As mentioned earlier, keeping all of your money in a savings account is a missed opportunity that could be costing you a huge chunk of your savings. Shark Kevin O’Leary cited keeping money in low-interest savings accounts as the number one money mistake to avoid when inflation rates are high, a lesson he says he “learned the hard way” when he was young.

How to Invest in Alternatives the Tax-Advantaged Way

Preserving your portfolio’s value is vital when inflation is high. Diversifying your portfolio with assets that have historically performed well during periods of high inflation can be a vital move in protecting your portfolio.

Alto allows you to invest in alternative assets not highly correlated with the stock market. With Alto, you can invest in the things you’re interested in-like securitized fine art, venture capital, and real estate using tax-advantaged IRA funds.

Get started by opening an Alto IRA or Alto CryptoIRA^® today.

Investing involves risks, including risk of loss. Do not invest without doing your research. Alto is an administrator and custodian of IRAs. Alto is not an investment advisor, broker-dealer, or exchange.