How to inflation-proof your investments

By John Towfighi, CNN

(CNN) — Consumer prices in April rose at the highest annual rate in three years, putting inflation back into focus.

Inflation eats away at the value of your dollar. Smart investing, however, can build wealth at a rate that outpaces inflation over time. And there are different strategies to make portfolios even more resilient against inflation.

There is no one-size fits all model, and investors’ ages, spending needs, risk tolerance and life goals are all important factors. But here’s what investment professionals say about inflation-proofing a portfolio:

Stocks and compounding growth

Putting cash to work in the stock market is one of the most important steps to protect your wealth against inflation, experts told CNN.

Part of that is because, over time, compounding returns can grow at a healthy clip, outpacing overall inflation.

Of course, the downside of stocks is that they can be volatile, and past gains don’t guarantee future returns. But investing in high quality blue-chip stocks or funds that track diversified benchmarks like the S&P 500 can help you stay ahead of inflation in the long run.

Since the end of World War II, the S&P 500 has delivered a compound annual growth rate of 11.3%, according to CFRA Research. In comparison, the Consumer Price Index has had a compound annual growth rate of 3.7%.

Investors should focus on shares in companies with strong balance sheets that pay dividends, and maintain a balance of investment styles, said Angelo Kourkafas, senior global investment strategist at Edward Jones.

Growth stocks, like those of Big Tech companies, can deliver outsized returns during periods of strong corporate earnings. Value stocks, like energy and financials, can generate steady returns and income during periods of higher interest rates and inflation.

A 3% annual inflation rate would double consumer prices across a 25-year retirement, according to research by Kourkafas. That statistic highlights the “hidden cost of cash,” he said, and how dollars can lose their value unless invested in an asset that grows faster than inflation.

“There’s not a magic solution, but it is likely a combination of investments that can help portfolios be more resilient to inflation pressures,” Kourkafas said.

TIPS and I bonds

Two of the best tools to inflation-proof a portfolio are actually offered by the US government, according to Jeremy Keil, a certified financial planner and advisor at Keil Financial Partners.

One asset that can help investors hedge against inflation concerns: Treasury Inflation Protected Securities, or TIPS. These are US government bonds, like Treasuries, designed with inflation in mind.

TIPS track inflation as measured by CPI. When inflation rises, the value of TIPS also rises, raising interest payments and returning more money to your bank account.

“It’s a government security, so very high-quality fixed income,” said Matthew Garrott, director of investment research at Fairway Wealth Management. “And then the inflation-protected piece is a cherry on top.”

But higher Federal Reserve interest rates can send TIPS prices lower, similar to standard Treasuries, hurting investors’ short-term returns.

The US government also issues I bonds. These bonds offer an interest rate that changes every six months based on the latest CPI data, maintaining returns above the level of inflation.

The downside: There is a $10,000 annual cap on new I bond investments along with restrictions on withdrawals. Investors aren’t able to get their money back for at least a year. Even then, there’s a penalty on withdrawing funds before five years.

Commodities and real estate

Investing in so-called “alternative assets” like commodities and real estate can also help diversify portfolios and offer protection against inflation.

In 2022, inflation spiked, hitting 9.1% year-over-year in July, the highest annual rate in decades. Stocks and bonds sank that year, highlighting the vulnerability of a classic portfolio mix of 60% stocks and 40% bonds when there’s an unexpected shock.

Putting money into investments with exposure to oil, energy, metals and agriculture, in addition to stocks and bonds, can be a good way to diversify an investment portfolio. Exchange-traded funds that track commodities are readily available – and no, you don’t have to store oil in your own bathtub.

Companies that invest in real estate, known as Real Estate Investment Trusts, or REITs, can also protect against inflation as rent and land prices rise. “REITs can offset inflation as landlords gradually raise rents while property values rise alongside replacement costs,” said Jon Ulin, a certified financial planner and chief executive at Ulin & Co. Wealth Management.

“The goal is… adding return streams and economic exposures that may behave differently when inflation or geopolitical risks surprise investors,” Ulin said.

“That said, alternatives are not magic bullets,” he added. “Commodities can be volatile, and REITs can still face pressure from higher rates.”

Gold is also considered an inflation hedge, with investors betting it will retain its value in crisis or if prices spike.

Experts who spoke with CNN had a range of opinions on the value of commodities, with some preferring to stick to stocks and TIPS and others focusing on allocations of up to 20% to commodities. It’s a reminder that portfolios depend on the person, and speaking with a professional adviser can also help navigate the uncertainty.

Investment manager Fidelity Strategic Investors is allocating to REITs, commodities and TIPS to “help hedge against the impacts of persistent inflation,” according to a note from Fidelity Wealth Management.

“The goal is not simply preserving account balances,” Ulin said. “It is preserving purchasing power and lifestyle over decades.”

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