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Investing Against Inflation: 5 Strategies Ranked From Best to Worst

Believe it or not, you shouldn’t panic about inflation. Not only because major media is designed to trigger us, but also because it isn’t helpful. Quite the contrary. It’s keeping our emotions in check, educating ourselves, and seeking out solutions that create long-term success.

That being said, not all solutions are created equal. So it’s important to consider the various advantages and disadvantages of each. Together we’re going to break down five strategies (from best to worst) in combating inflation. There are other more complex investments too – but these constitute the first line of defense. 

1) Stocks

When it comes to hedging against inflation, good ol’ fashioned stocks are your best friend. They’re easy to buy, diversify, and liquidate. Additionally, when used correctly, they have quite the track record in outpacing inflation over time.

Take the S&P 500 for example. Investors have seen average annual growth of around 10% since the early 1990s.1 This performance consistently outpaces the Federal Reserve’s target inflation of 2%.1 And it’s even ahead of the 40-year-high inflation we’ve seen this year of 7.9%.2 

Stock solutions are also not limited to the United States. And the fight against inflation is global, not just domestic. This past year, the price of oil has been the main go-to used by the media to describe inflation. That said, let’s take the Saudi Arabian ETF, (ticker: KSA) as an example. 

Since the start of this year, this index has risen over 15%3 while the S&P 500 was down nearly 5% at the end of last month.4 We use this example to help illustrate that not all inflation hits countries the same way. Diversifying with international stocks can outpace inflation with healthy returns and potentially less volatility. 

2) Real Estate

The reason real estate comes in second is due to its greater work required, higher barriers of entry, and lower liquidity. But make no mistake, savvy real estate investing can easily go toe-to-toe in fighting inflation when given adequate time. 

Assuming you can afford the down payment, property management, and time to sell, real estate can pay for itself and then some. That’s because rent payments can be used to pay yourself or your property’s mortgage. Then, when it comes time to sell, you’ll ideally have an appreciated asset that can be sold well ahead of inflation. 

It’s worth noting that recent times have been phenomenal for real estate sales. In 2021, we saw the median home price appreciate 16.9% from 2020.5 You should also know real estate investing takes many forms each with their own pros and cons. You can read about some of the different types here

3) Some (Not All) Types Of Bonds

When the topic of conversation switches to bonds, we stop shooting for the stars. That’s because bonds were not designed to “beat” inflation, but some can rise above it. Bonds are also quite complex and diverse. And most investors struggle to understand them – even though the bond market is more than twice the size of the stock market. Nevertheless, some of these more conservative strategies deserve their credit and due diligence in fighting inflation. 

Let’s start by discussing Treasury Inflation-Protected Securities (TIPS). These have maturities of 5, 10, and 30 years, and they pay out interest every 6 months. Additionally, their principal amounts are adjusted based on fluctuations in the Consumer Price Index. Simply put, TIPS try to neutralize the effects of inflation, but they aren’t bringing any notable returns.6

There are bonds, however, that do focus more on returns. Generally speaking, these are riskier and come in forms like high-yield corporates, senior floating rate, international, and emerging market bonds. In times like these, asking these riskier types of bonds to pull their weight might cause more risk of loss – but in a war against inflation, more risk is needed to stay ahead. 

Owning a portion of all those types named above in addition to your “safe” bonds, will help the bond portion of your portfolio hold its own in the fight against inflation. And if your time frame is longer (say 10+ years) – you’re still likely better off letting stocks handle more of the inflation battle. 

You can find geographical diversification benefits by investing in international and emerging market bonds as well as stocks. And the same holds true for higher yielding corporate bonds versus the relative safety of government, and AAA rated bonds. But again, if your time frame is longer- riskier bonds may not be better than stocks. One study measuring between 1980-2019, found that in most cases, high-yield corporate bonds failed to outperform the S&P 500.7  

4) Commodities

Anytime inflation becomes an issue, you’re virtually guaranteed to start hearing about the need to invest in commodities. Commodities are their own asset class, and consist of agricultural products and raw materials. Examples include, but are not limited to precious metals (ex: gold), cotton, lumber, corn, wheat, sugar, and oil.8 

But there are some major drawbacks to commodities. One of the biggest being the need to buy them in bulk, which poses a larger financial barrier to entry. Additionally, commodities trade on the futures market, which is more complex than the average investor’s knowledge may be equipped to handle.8 

Another disadvantage to some commodities is their historical performance when compared to assets like stocks and real estate. Gold is often oversold to the public (my opinion) because of its legendary cache (e.g. The Gold Standard, The Gold Rush, El Dorado, etc.). Over the longer term, stocks seem to outperform gold by about 3-to-1.9 Also keep in mind that gold isn’t an income-producing asset. Commodities can fail to offer the dividend payments of some stocks.9 

5) Cryptocurrencies 

Saving the best (or possibly worst) for last, we have cryptocurrencies. Before even thinking about getting involved with this option, you should understand how they work. Once you do you’ll understand that they’re very design is to hedge against inflation. But there’s still an issue. 

Cryptocurrencies are still a revolutionary form of payment. And their performance over time has been anything but consistent, so it’s still too early to judge. Yes we saw Bitcoin’s price explode in value. But we also saw it (along with other leading cryptos) plummet just recently. And so far in 2022, we’ve only seen a partial recovery in its peak value.10 

Cryptocurrencies deserve their attention. But when it comes to what you should invest in them, think in terms of “play money.” There’s a chance you could win big, but also one to lose huge. Until we know more, cryptocurrencies should be low on your list on how to beat inflation. 

How To Stay Ahead

When we plan together we’re able to look at your present situation, clarify your goals, and customize an investment strategy to take you there. Part of this strategy accounts for high inflation, and the risks you may or may not want to take to protect your wealth. Feel free to reach out to us at (650) 336-0598, or fill out a contact card here, and we’ll reach out to you.

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Kingston Hollman MBA


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Client Operations Manager

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Founder & CEO

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