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Portfolio > Portfolio Construction > Investment Strategies

How to Hedge Your Clients’ Portfolios Against Inflation

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What You Need to Know

  • Certain asset classes can be used to create an investment strategy to beat inflation.
  • Investment strategies for inflation should be layered on top of goals-based strategies, giving care to your client's risk tolerance and long-term goals.
  • Although fixed income is the most notorious asset class for inflation sensitivity, longer-term debt is more sensitive to inflation than short-term debt.

Though the Consumer Price Index’s 8.3% increase in April is a slight reprieve from its 8.5% rise in March, inflation is still weighing heavily on Americans’ minds and wallets. When the inflation rate rises, clients may be worried about the increasing price of everything from food to electricity. And many watchers of the Federal Reserve will be looking closely to see how monetary policy changes as a result.

Even the most optimistic financial advisors may want to assess whether their clients’ portfolios are sufficiently protected and if there are ways to beat inflation with investment strategy.

Inflation may affect a client’s portfolio in several ways, most notably by eroding the value of cash and weighing on fixed income securities. As interest rates rise, fixed income investments will traditionally suffer because their price is inversely correlated to interest rates. As interest rates rise, bond prices fall.

Inflation-Aware Investing

As a financial advisor, you’re responsible for managing your clients’ long-term outlook. Whether the current inflation rate is transitory or more entrenched, fear should not overpower solid financial planning. For example, it likely wouldn’t make sense to change a client’s asset allocation drastically to account for inflation, only to find that the asset mix is no longer appropriate for their time horizon and risk tolerance.

Inflation-aware investing is one tool to help you preserve value and help your clients maintain their buying power. That said, no strategy is a guarantee, and macroeconomic events maintain the ability to surprise even the most seasoned analysts. Investment strategies for inflation should be layered on top of goals-based strategies, giving care to your client’s risk tolerance and whether inflation-busting strategies will divert from their long-term goals.

Short-Term vs. Long-Term Effects

Although fixed income is the most notorious asset class for inflation sensitivity, longer-term debt is more sensitive to inflation than shorter-term debt. That’s because inflationary effects will compound over a longer time period. By contrast, high-yield bonds with shorter durations may fare better.

In the short term, equities may be less affected by inflation; some companies might actually post positive performance if inflation gives them cover to raise prices. Longer term, however, high prices might discourage consumers from spending money, and higher interest rates may increase borrowing costs for companies. Both of these could negatively impact equity performance.

Nonetheless, some asset classes typically fare better than others in an inflationary environment.

Which Asset Classes Traditionally Yield More During High Inflation?

Gold and Other Commodities

For centuries, gold has been one of the most classic inflation hedges. (To some extent, other precious metals, such as silver, also fall into this category.) Gold is a physical commodity and is often considered a safe haven — after all, gold will always have value. All the same, gold has been more volatile in recent years and some experts express skepticism about whether it’s truly the inflation hedge many think it is.

Treasury Inflation-Protected Securities (TIPS)

One specific class of bonds is built for inflationary times: Treasury inflation-protected securities, or TIPS. These are pegged to inflation, so as the CPI rises, so does the value of your clients’ TIPS.

Real Estate

Another traditional inflation hedge, real estate is a physical store of value that has the ability to generate rental income — and this rental income may increase during periods of high inflation. One caveat: Housing prices are sensitive to interest rates, as high rates may affect consumer demand. Additionally, high interest rates can affect investors’ ability to borrow and therefore the overall demand for real estate investment.


Although inflation may hurt the stock market over the long term, some equities react differently than others. Stocks with high dividends tend to suffer during high inflation in much the same way as fixed income investments. Meanwhile, value stocks may have better pricing power to help them weather the storm, and companies with inelastic demand may find it easier to pass their increased costs on to consumers.


One of the big selling points of cryptocurrency is its limited supply; no central authority can simply print more money. As a result, some investors view cryptocurrency as an inflation hedge. However, at least at this moment, Bitcoin’s value has been closely correlated to that of the stock market. Despite its anti-inflation underpinnings, many investors seem to be trading crypto as a speculative asset rather than a safe haven.

How to Discuss Inflation Investment Strategies With Your Clients

Many clients may be spooked, especially because inflation is a dominant news story. You might calmly explain the macroeconomic factors at play — supply chain hangups, pent-up demand, self-reinforcing cycles of consumer expectations — and the factors that could moderate the situation, such as monetary policy.

In the meantime, you can discuss clients’ long-term objectives and how their portfolios remain focused on their individual goals. Then, you might walk clients through your tweaks to their overall strategy to account for protection against inflation, such as reallocating a portion of their bond portfolio toward TIPS or pursuing investments in the real estate market.

 (Image: Adobe Stock)


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