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How to invest with high inflation?

Baptiste Wicht | Updated: |

(Disclosure: Some of the links below may be affiliate links)

Recently, inflation has started to climb again, especially in the United States. And many investors are worried about what this will do to their investments.

So, I want to talk about what we should do to our investments when inflation rises and what asset classes perform best when prices increase.

The return of inflation

First, it is important to say that inflation never went anywhere. In the united states, like in most countries, inflation has been positive every year in the last two decades.

The current change is that the United States published a 6.8% in December 2021. You can read about this in the official news release. It means that the prices of a given basket of items increased by 6.8% over one year. 6.8% is a significant number.

However, it is essential to note that between October 2019 to October 2020 (the previous measured period), inflation was only 1.2%. So, we only have one year of high inflation.

And we should consider that much of this inflation is due to supply chain issues and the COVID recovery.

So, while 6.8% inflation is significant, we are not in a hyperinflation territory. There have been much higher numbers in the past. So, we should not worry too much.

Nevertheless, it is important to know how to invest in times of inflation.

What performs well in times of inflation?

To know how to invest in times of high inflation, we can look at the assets that historically performed best when inflation was high. I will take the United States as an example since it is currently the largest market.

Historically, real estate has been the highest-performing asset in high inflation years. I am not talking about home prices, but general Real Estate Investment Trusts (REITs) that heavily invest in commercial real estate and large development projects. On the other hand, U.S. home prices have kept up with inflation, but not more.

After this, international stocks have been second while U.S. Stocks have been third.

Does that we should switch to REIT when inflation starts? No! First, we have no way of knowing when we should change since inflation data would generally be too late. Second, we are usually interested in average or median real returns. Real returns are returns after inflation.

Here are the average real returns of asset classes from 1972 to 2021 (based on data from PortfolioVisualizer, here):

  • U.S. Stocks: 8.38%
  • REIT: 7.35%
  • Gold: 6.38%
  • International Stocks: 5.29%
  • U.S. Bonds: 1.87%
  • Cash: 0.71%

Often, median returns are more interesting, so here are the median returns:

  • U.S. Stocks: 12.87%
  • REIT: 9.00%
  • International Stocks: 8.13%
  • U.S. Bonds: 2.92%
  • Gold: 2.45%
  • Cash: 1.79%

If investing long-term, you should generally not change your asset allocation based on current events. On the contrary, your portfolio should be based on what you think will perform well in the future. And often, the only tool we have is historical real returns over long periods.

So, based on these returns, we should not switch anything because of inflation. Stocks have retained their value very well historically over the long term. There have been very high inflation periods in the U.S. in the past (the 1970s, for instance), and stocks have kept up.

We can simplify this. Assets that provide fixed payments, like bonds, generally perform worse in times of inflation than assets based on monetary payments and can adjust to price increases. For instance, most business will adapt their prices adequately and perform as well as usual. This fact is not always true, and very high inflation can also hurt businesses. But generally speaking, companies are faring well enough when prices increase.

Therefore, investing in stocks according to your proper asset allocation is still a good strategy. Of course, you should be diversified. You want stocks in many countries and industries. And if you are investing in the total stock market, you will also invest in REITs since many of them are listed in the stock market.

What about gold?

Gold is very often referred to as an excellent hedge against inflation. So, should we all own gold to prevent inflation?

Probably not. The previous section shows that gold average real returns are lower than stocks, and median real returns are below 2.5% yearly! These are not great numbers. So, investing heavily in gold would not have been great, except for some periods.

There have been some great periods for gold in the past. For instance, the 1970s have been great, with huge returns. And the 1970s was a period of very high inflation.

On the other hand, gold performed very poorly in the 1980s. During this period of medium inflation, gold real returns were negative. It means that investors would have lost money, not even kept up with inflation.

Gold can be a good investment, but it has not been a great inflation hedge in recent decades. Having some gold in a portfolio can make some sense. But I do not believe investing heavily in gold will help, given its lower real returns.

What about debt?

In times of high inflation, debt is interesting. Since interest payments are generally fixed for several years, the real value of these payments will shrink over time.

So, in times of high inflation, it may make sense to take out debt to buy something that will retain its value, like real estate. You could even take out debt for stocks, but stocks are much more volatile, which would be significantly riskier.

I do not necessarily recommend taking out debt just because inflation is here. But taking a mortgage just before a strong inflationary period may be an excellent financial move. However, as mentioned before, there is no way of predicting inflationary periods. Therefore, it comes more down to luck.

Currency exchanges and inflation?

Inflation may have an impact on exchange rates as well. It is especially important for us, European investors with a  large allocation in foreign currencies in our portfolios. Therefore, currency exchange rates can play a significant role in our returns.

Generally, strong inflation hurts currency exchange rates. For instance, if there is high inflation in the United States, the dollar value may be lower than other currencies. Therefore, it is essential to have some home bias in your local currency to protect against these temporary events.

It is important to note that inflation (and interest rates) is only one factor that plays a role in currency exchange rates. So, just because inflation is high does not mean that currency exchange rates will move in one direction or another.

It is also important to note that if inflation is global like it seems to be the case currently because of supply chain issues and COVID, the effect on currency exchange rates will likely be limited. In general, local inflation events will have a more significant impact on currency exchange rates.

What can we do?

Now, what can we do about inflation?

As seen in the previous sections, there are a few things we can do:

  • Invest in assets that perform well in times of high inflation, like stocks and REITs
  • Invest in assets with good average and median real returns, like stocks
  • Use debt wisely
  • Avoid assets with fixed payments
  • Avoid too large exposure to a currency with  high inflation

These moves will help reduce the effects of inflation on your investments. But they will not eliminate these effects. We have to live with price increases. And if inflation is global, as it seems to be the case currently, every country will be exposed.

Conclusion – What should we do?

In summary, we should not do anything in reaction to high inflation. When high increases in prices are announced by statistics offices worldwide, it is probably too late already to do anything. I will not change anything on my portfolio because of the return of high inflation.

What is important is to be prepared for inflation. Ideally, your portfolio should contain assets with high real returns. That way, regardless of the situation, you will have good returns, on average.

And as always, you should take your risk capacity into account in your asset allocation. With a reasonable asset allocation, you can withstand most situations without trouble.

If you are not yet investing and are worried about your purchasing power, it may be a good time to start investing in stocks.

I will personally not change anything in my strategy because of price spikes. And you?

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Baptiste Wicht started in 2017. He realized that he was falling into the trap of lifestyle inflation. He decided to cut his expenses and increase his income. This blog is relating his story and findings. Since 2019, he has been saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

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30 thoughts on “How to invest with high inflation?”

  1. Hi Baptiste!

    Thanks a lot for your blog. I’ve already benefited quite a bit from fruits of your labor ;)

    I’m relatively new to investing but gradually building my brain muscle.
    I was thinking if there is a way to improve buy and hold VT strategy in the times of high market and volatility and directionally tactical protective put options should do the job. But at the same time it looks like too easy to be true (e.g. maybe such hedge is too expensive).

    Have you ever looked in that direction? Do you have an opinion on this?


    1. Hi Andrei,

      If you are relatively new to investing, I strongly recommend you don’t start delving into options. These are advanced stock market instruments that most people will never use.
      There are ways to provide good hedging with options, but it’s generally for the short term. If you are a long-term investor, you should not consider such strategies.
      For long-term investors, the important thing is to have a well-defined asset allocation, adapted to your risk capacity and just stay the course.

  2. Hi PoorSwiss

    The stock market (see e.g. VT) might soon experience a correction (the estimate is around 10%). Would you always stay with your portfolio (not sell) or sell and wait out the expected correction and go back in afterwards? Lets say you didnt buy a house and would still have it all in VT/CHSPI … so the stakes are higher.

    1. Hi Fico,

      My portfolio is back at high levels, higher than before the house, so the stakes are high :)
      And I would definitely NOT sell. I continue buying every month, regardless of the prices. People lose money by trying to sell and buy back.
      The only thing I would consider reasonable is to invest less money and put it back in the market once the market goes down.

  3. In the section on Gold you write: “But I do not believe that investing heavily in stocks will help, given its lower real returns.”

    I think you mean “investing heavily in Gold?”

  4. Hi, partially related question. I just got a C permit, therefore I’m not anymore taxed at source.
    I receive a “gross” salary, which includes the money I’ll have to pay later as taxes.
    This means I will receive upfront some money that I need to “park” in a rather liquid way, to be ready to turn into cash for tax payments later in the year.
    Any sensible “parking strategy” you have identified?
    Thanks in advance!

    1. Hi MF,

      Currently, the only reliable parking strategy for a single year is a bank account. If this is really high and exceeds the free limits of your bank, you can spread it over several banks.
      In the US, TIPS would be a possibility, but not sure they would work well for such a short time.

      1. No, it’s not a huge amount beyond the limits.
        I was considering a liquidity fund, but for such a short time the fees would eat the returns. So, bank account then.
        Thanks a million for your insights.

    1. There is no such thing as a sure bet. But in general, you should be looking for diversification.
      FTSE Europe index or Euro Stoxx 600 are good indexes for Europe. But they could fall a lot in the coming years, like the entire stock market.

  5. Hi Mr PoorSwiss,
    What about cryprocurrencies? Bitcoin is really strong against inflation and might beat gold as reserve of value in a few years. Looking at the past return any investor should consider to invest at least a little bit in Bitcoin eventually Ethereum, if possible little by little to average the cost of purchase. Then if it’s smart to invest in other cryptocurrencies with smaller market cap is way more risky (with higher potential of return of course) but it would be too much time consuming for most investor. But Bitcoin and Ethereum is easy to buy and hold, it’s buy and forget for long term that can boost our portfolio, especially in case of high inflation.

    1. Hi Eluc,

      The reason is simple: we don’t have enough data :)
      To say that bitcoin beats inflation over a few years is not enough for me to recommend changing strategy to cryptocurrencies because inflation is back.
      On the other hand, I am considering investing again a little in cryptocurrencies, but I still have to find a proper platform for this. And this is unrelated to the inflation issue.

  6. Hi Mr. PoorSwiss,

    Out of curiosity, why don’t you invest some small percent of your portfolio in cryptocurrencies? Obviously this is still a high risk investment but you are heavily invested in ETFs so it could perhaps nicely balance your ETFs. I wouldn’t go into BTC anymore, but some small caps, like QANPlatform for example, with a high growth opportunities would be an option.

    1. I see that I’m not the only one talking about crypto. But I would clearly not recommand to gamble on low market cap coin, especially total unknown one like you suggest. Investing in coin with low market cap and high potential require a lot of knowledge, education of the industry and time to follow and understand everything involved.
      Bitcoin and Ethereum might be much more safe in long term related to the overall cryptocurrency market. They have the most added value in term of security, all others are mostly security and decentralization compromise in profit of scalability. Also most other coins from the top 10 were not here a couple of years ago.

    2. Hi Mat,

      I am considering that in the future. I am thinking of having 5% of my investments again in crypto. However, I did not find a good platform for this yet. A lot of platforms are very sketchy, very scammy, very expensive or very complicated.
      This may be something that I will do in 2022.

      1. To be honest it’s pretty easy nowadays. You cannot be wrong if you chose one of the first 5 exchanges for trading volume.

      2. Hi Baptiste, you can exchange your chf to usd with your revolut card or similar. Then deposit your usd to etoro.

      3. That’s a good point. But it’s honestly too troublesome. A good investment platform for Swiss investors has CH IBAN, otherwise, I won’t use it.

        But I understand that some people are doing that.

      4. For foreign platforms, I only know IB and DEGIRO. All Swiss brokers have a CH IBAN of course :)

        But I am sure there are other foreign platforms with a good CH IBAN.

      5. I currently use Kraken and Lykke, you can deposit in CHF in both.
        Kraken fees when trading are reasonable, tradin wiht Lykke is free, the charge you extra when whitdrawng crypto from their platform.

    3. Hi Baptiste,

      I came to your blog to see what your advice was for the current period of rising inflation. As I only started to invest in Feb 2022 with IB, all my ETFs are low. I did a short analysis and Im losing the most on VT (8.5%), next on VOO (7.5%) and the least on VO (5%). So there is some learning in the downturn, at least Im getting a real-time analysis :-)
      I’m now waiting for mid-May to make my monthly payment as markets may calm down. On the other hand my True Wealth portfolio (also invested in Feb 2022 as per the review on your site, thank you very much!) is actually only down 2% so maybe I should stop investing further through IB (plus the TW portfolio is in CHF) as TW seems to know what I dont about investing!!!
      On cryptos, I use Binance, it has one of the lowest spreads. eToro is ridiculously expensive to trade. I trade each month on ETH (not Bitcoin which is more volatile). With low spreads one can make, 200-300 USD per month, by trading on low profits (approx. 2%) and investing a base of 4000 USD. Its a simple strategy to get some spending money. I personally dont hold more than 7 days but neither do I sell at a loss.
      Hope helpful. Cheers

      1. Hi Priya

        Don’t try to draw conclusions too early :)
        Feb to May is basically irrelevant in an entire investing journey. It’s too short.

        My portfolio is also down significantly since the beginning of the year, but I don’t change anything to my strategy, I still keep on buying every month. It’s not a great idea to wait, just keep the course.

        TW is likely better in this case because they probably invest more in CH stocks which did better this year than International Stocks. They did not do great, but not as bad.

        Be careful about cryptos, most people underestimate the risks of crypto.

  7. Hi Mr Poor Swiss,

    Answering to your question, I’m not changing my investment strategy because of inflation.

    Maybe I will act only and if interests start increasing considerably but I’m not expecting that soon.

    Luis Sismeiro

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