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If you have been to the grocery store lately, you may have noticed that some of your favorite items are in smaller packages.  What you may not notice is that the price of that item is about the same as it was when the package was bigger.  Even the Fun Size candy bars are less “fun.”  A box that used to contain six snack bars now only have five.  Some boxes still contain six bars, but the bars can be eaten in just four bites when it used to take at least six bites.

There is no shrinkflation with gas prices as you still get the same volume, but the price is significantly higher than they used to be, though they have come down lately.  The monthly utility bills also seem to be moving higher along with a host of other items.

In the Federal Reserve’s effort to get the inflation rate back to 2%, there is a high probably of a recession occurring if it hasn’t already.  This also means there may be some additional volatility in the markets and investors may need to consider a different approach with their investments to limit the volatility.

Equities & Alternatives

Stocks can be quite volatile during inflationary times but can be a good place to invest money if you are focusing on the long term.  However, some equities do better than others if inflation is high.  In general, value-oriented stocks perform better than growth-oriented stocks during times when inflation is greater than 3%.  Value-oriented stocks tend to fluctuate less than growth-oriented stocks and can come in handy during more volatile times.

Quality stocks in the energy, consumer staples, and health care sectors can potentially help to reduce the volatility of the overall portfolio.  These sectors may also be able to generate better than average dividend yields to help with the total return of your equity holdings.

Real estate may also be a good investment during times of higher inflation, but of course, requires larger sums of money to invest in.  An alternative would be a real estate investment trust (REIT) where you can get the benefit of a diversified pool of real estate holdings in one easy to trade fund.  The dividend payout is typically higher than the average stock.

Commodities and precious metals can also provide a hedge against inflation.  However, it can be cumbersome to trade and hold such things as gold or silver bars or coins.  It would be more efficient to purchase shares in a fund that holds the commodity or precious metal you wish to own.  It is more efficient when trading and avoids storage costs.  These types of assets typically do not generate income, so you are relying solely on the increase in market value of the shares in order to make any money.

Fixed-Income & Cash Equivalents

With high inflation, there is typically rising interest rates.  It is very tempting to invest all your money in very short-term bonds, CDs, and money market funds.  Since it is always difficult to determine when interest rates will peak or bottom out, it is a good idea to ladder out your maturities.  This will help to take some of the emotion out of the investment decisions.  Of course, if rates are rising, you may consider shortening your ladder and if rates begin to fall, you may consider lengthening your ladder.

A couple of fixed-income investment options that do well during inflationary times include I-Bonds which are now yielding over 9%.  Unfortunately, there is a low limit on the amount of I-Bonds you can hold.  Treasury Inflation Protection Securities (TIPS), issued by the U.S. government, are indexed to inflation.  Floating rate funds invest primarily in adjustable-rate loans whose rates will adjust with the change in the index to which the loan rate is tied.

Money market mutual fund rates are climbing and typically increase or decrease very rapidly whenever the Federal Reserve changes rates.  This can be a good option for short-term cash needs or to help preserve the value on a portion of your overall investment portfolio.

Of course, there is no guarantee any of these investment options will perform as expected if we continue to have high inflation and rising interest rates for long periods of time.  You should consult with your financial advisor before making any changes to your investment portfolio so that you adhere to your overall investment objective and risk tolerance.