The worst investments during inflation, listed (2024)

FAQs

What investments are bad during high inflation? ›

Holding long-term fixed-rate investments, such as long-term bonds, fixed annuities, and some types of life insurance policies, during inflation can be bad because their returns may not keep up with inflation.

High inflation has historically correlated with lower returns on equities. Value stocks tends to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.

Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS. Many people have looked to gold as an "alternative currency," particularly in countries where the native currency is losing value.

“Investing should always be a process over time, but when you're in a high inflation environment and the Fed is aggressively tightening monetary policy, it is without a doubt a riskier time to be in equities,” said Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab.

An inflation rate between 1% to 3% is typically considered healthy for stocks. Periods of high inflation, on the other hand, often cause uncertainty, volatility and a slowdown in spending, leading to lower economic growth.

Why is cash bad during inflation? ›

When the prices for goods and services are rapidly rising, holding cash in your portfolio becomes less attractive. The prospect of prolonged inflation “argues against having too much in cash,” Christine Benz, director of personal finance and retirement planning at Morningstar, recently told The New York Times.

Less expensive tangible assets that do well during inflation include many types of commodities. Agricultural commodities like wheat, corn, soybeans, livestock and timber are among such commodities. Industrial metals like nickel, copper and steel also tend to do well during inflation.

Savings Bonds

These are typically considered safe investments because the value can't decline, which makes them a stabilizing investment during inflation or other periods of uncertainty.

Inflation benefits those with fixed-rate, low-interest mortgages and some stock investors. Individuals and families on a fixed income, holding variable interest rate debt are hurt the most by inflation.

Historical data from previous periods of stagflation show us that gold, energy stocks, agricultural stocks, and real estate, in particular, are the top performers during stagflation.

What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.

What are four types of investments you should avoid? ›

Therefore, when the inflation rate rises, value stocks tend to perform better. On the other hand, Growth stocks have minimal cash flows. Therefore, they have a negative correlation with the rate of inflation. The market price of these stocks drops when inflation rates rise.

Inflation is the silent killer of cash and low-return investments. The S&P 500 has handily beat inflation over time. If you keep large amounts of money in a savings account, that money's buying power is being widdled away by inflation at about 2-3% or more per year. More in 2022 and 2023.

In general, inflation brings down share prices because consumer confidence (and consumer spending) tends to decrease. Specifically, growth stocks tend to be worse off during inflationary periods, with investors often turning to value stocks instead.

By most measures, low-income households have been hardest hit, experts say. The lowest-paid workers spend more of their income on necessities such as food, rent and gas, categories that also experienced higher-than-average inflation spikes.

Inflation means the value of money will fall and purchase relatively fewer goods than previously. In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts.

A basic rule of thumb is that investing in the stock market is better for long-term goals, while savings accounts and other bank products are better suited for short-term goals. A high-yield savings account, for example, gives you a guaranteed rate of growth and immediate access to your money anytime you want.

Value stocks and companies in defensive areas like consumer staples and health care also outperformed other sectors during the 1970s, Wantrobski says. Along with those defensive sectors, he believes investors should also focus on materials and energy, instead of gold.

With the main causes of high inflation now running in reverse gear, the economy is set to receive a large deflationary impulse. After peaking at 6.2% in 2022, we expect inflation to fall to 3.5% for 2023. Over 2024 to 2027, we expect inflation to average just 1.8%—below the Fed's 2% target.

On average, dividends account for 41% of market return since the 1940s—and the ratio increases for decades with higher inflation. During inflationary periods since the 1970s, dividend-paying stocks generally outperformed non-dividend paying stocks.

How bad will inflation be in 2023? ›

Where are inflation rates expected to go in 2023? It depends on who you ask — and what the future holds. Inflation may drop to around 3.5% "in the next few months," Kiplinger said. New York Federal Reserve Bank president John Williams predicts inflation will hit that rate "by the end of this year," NPR reported.

How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs. The guidelines fluctuate depending on each individual's circ*mstance.

Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.

Keep Cash to a Minimum

Danielle Miura, CFP, the founder and owner of Spark Financials, suggested, “You should keep enough money on hand to get you a couple of gallons of gas, pay for a delivery tip, or to help in unfortunate events,” or around $100-$200 at a time.

Gold and silver.

Gold is often used as a hedge against inflation since its value tends to increase even as the value of other currencies drop. While investments in gold and other precious metals may not generate income, they can help to offset stock market risk during stagflation periods.

Stagflation and real estate

When the economy stagnates and the inflation rate is high, this has a negative impact on property prices. Therefore, during stagflation, it can be difficult to sell your property for a profit, especially because you'll still have to pay capital gains tax.

Defensive stocks look like a clear winner

Stagflation tends to favour defensive companies whose products and services are essential to people's everyday lives. This means their share prices tend to hold up better when the economy slows.

How Can It Impact Savings? Over time, inflation can reduce the value of your savings, because prices typically go up in the future. This is most noticeable with cash. If you keep $10,000 under your bed, that money may not be able to buy as much 20 years into the future.

Money burning is thus equivalent to gifting the money back to the central bank (or other money issuing authority). If the economy is at full employment equilibrium, shrinking the money supply causes deflation (or decreases the rate of inflation), increasing the real value of the money left in circulation.

How do you live frugally during inflation? ›

Buying in bulk

You can save on groceries during inflation by buying household products in bulk at warehouse stores like Costco and Sam's Club. These memberships come with an upfront cost, but you'll lower your per-unit cost. And buying in bulk can help you make fewer trips to the grocery store.

High-quality bonds and fixed-indexed annuities are often considered the safest investments with the highest returns. However, there are many different types of bond funds and annuities, each with risks and rewards. For example, government bonds are generally more stable than corporate bonds based on past performance.

Present value of perpetuity:

So, a $100 at the end of each year forever is worth $1,000 in today's terms.

By most measures, low-income households have been hardest hit, experts say. The lowest-paid workers spend more of their income on necessities such as food, rent and gas, categories that also experienced higher-than-average inflation spikes.

You should save more during times of high inflation. When inflation is high, your money won't go as far. Spending less can help offset higher prices.

Regardless if inflation is here to stay or will slow down in the next few months, experts recommend always having between three to six months of living expenses saved up.