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Protecting Your Assets

How Inflation Should (and Shouldn’t) Change Your Investing Strategy

10 Minute Read

America’s red-hot inflation is showing no sign of slowing — and if that has you worried about your investment portfolio, you’re not alone.

Consumer prices jumped 9.1% in the 12 months ending in June, marking the largest increase since 1981, according to data from the United States Labor Department. Prices rose 1.3% from May, when the inflation rate was 8.6%. Despite experts hinting for months that we may be reaching peak inflation, the prices for many things remain sky-high.

Now, there are concerns the U.S. could be facing “stagflation,” a term used to describe an economy with soaring prices combined with slowing growth that could lead to high unemployment. The combination of 40-year high inflation and a continued unreliable supply chain has exacerbated those fears.

With all the inflation headlines swirling, you may be wondering: What exactly does this mean for your 401(k) and other investment portfolios?

“Stagflation is definitely a concern, and we are seeing risks of a recession as well,” says Mindy Yu, director of investing at Betterment at Work. “We have a lot of investors in the market who are really confused because they’re seeing both stocks and bonds declining, and they just don’t know where to invest.”

If you’re among them, resist the temptation to chase performance and time the market. Instead, follow this expert advice.

Reassess your investment plan

Most financial professionals tend to recommend staying the course even when markets get volatile, as we’re seeing now in the face of high inflation. But Don Bennyhoff, a chartered financial analyst and chief investment officer at Liberty Wealth Advisors, says to only take that advice if you have a solid plan in place.

“If you’re in a spot where you’re second-guessing what you’re doing in your portfolio or second-guessing your investment strategy, it probably pays to revisit your financial plan,” Bennyhoff says. “And if you don’t have a financial plan, now would be a good time to set one up.”

Part of having a strong financial plan is having an asset allocation in your investment portfolio that aligns with your goals, time horizon and risk tolerance. Those factors are different for each person, so it’s impossible to make a blanket recommendation that applies to everyone.

Another important part of your plan is a safety net of emergency savings.

An emergency fund is especially important when there’s potential for an economic downturn. Because stagflation can also mean unemployment ticks up, you want to be sure you’ll be set in the face of any unexpected changes, like job loss. Many financial advisors recommend having enough cash on hand to cover three to six months of expenses — and to increase that amount if you’re especially worried.

Shuffle your stocks and bonds

If you are worried that inflation is here to stick around, there are some adjustments you can make to your portfolio to help you weather any upcoming storms in the market.

This, too, is dependent upon your financial plan, but you may want to think about lowering your exposure to bonds and upping your exposure to stocks, says Scott Ladner, chief investment officer at Horizon Investments.

“Bonds are a guaranteed loser in a high-inflation environment,” Ladner says.

That’s because stock prices are based on what companies earn, and if inflation is high, companies can sell their goods and services for higher prices. Fixed-income assets like bonds, on the other hand, can be negatively impacted by inflation because inflation can lead to higher interest rates. Higher interest rates, in turn, can erode the value of those fixed-income securities.

But at the same time, companies also face raising costs. That’s why defensive sectors are a better bet than other, more cyclical sectors during inflationary times, Ladner says. While defensive stocks might not offer as much of a profit when the market is doing well, they tend to provide stable earnings no matter the economic environment. 

This doesn’t mean you should immediately head to your investment portfolio and dump all your bonds for stocks. It is still important to have a diversified portfolio. But if you have some cash on the sidelines you want to put to work, Ladner says to consider stocks over bonds in the face of inflation.

However, there are bond options for those looking to hedge against inflation: I bonds. As Margaret Giles of Morningstar points out, I bonds are Treasury bonds that earn monthly interest that combines a fixed rate and the rate of inflation, which means yields go up as inflation increases.

Be careful with alternative assets

While you want to have a diversified portfolio, deviating far from a stock-bond portfolio is not ideal — even though alternative assets can sound appealing when you read about them or see recent returns, Bennyhoff says.

People often think commodities can be a safe haven during volatile times, but they don’t usually do well when the global economy slows, Ladner adds. Despite the fact that some commodities like oil and metals rallied this year, you don’t want to entirely abandon your investment plan and load up on these assets.

Crypto has also become a popular asset in recent years, leading to the the crypto market’s value skyrocketing from $965 billion to as much as $2.6 trillion last year.

But as well as crypto performed during the pandemic, it’s also taken a hit as the Federal Reserve has hiked interest rates in recent months. Despite crypto advocates claiming digital assets are a hedge against inflation, experts say that’s not actually true — as evidenced by the falling prices in today’s inflationary environment.

If you want to take some risk off the table, Yu says to think about diversifying your assets by rounding out your exposure to broad-based ETFs, for example, rather than relying on volatile assets like crypto.


This article was written by Mallika Mitra from Money and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to


The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.

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