7 Ways to Create a Winning Portfolio During Inflation

Inflation recently hit a 40-year high, rapidly eroding the purchasing power of every dollar you have. High inflation makes successful investing that much more important. After all, if you can’t get your money to grow at least as fast as inflation, then you wind up poorer in very real terms.

Unfortunately, there are no real guarantees when it comes to investing, but you can boost your chances of at least keeping up with inflation. These seven ways to create a winning portfolio during inflation can give you a fighting chance, even as rapidly rising prices claw away at the value of your money.

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The U.S. government allows each American to directly buy $10,000 of I-Bonds through TreasuryDirect each year and an additional $5,000 through tax refunds. I-Bonds pay interest that adjusts twice a year based on inflation. The most recent interest-driven rate for I-Bonds is 7.12%, which roughly kept up with inflation at the time that those rates were set. The next reset is for May, and unless there’s a rapid deceleration in inflation, it is likely that the rate will bump up a bit.

While I-Bonds can be a great substitute for cash when it comes to money you expect to have around for a while, do note that there are strings attached. For instance, if you cash them in before you’ve held them for at least five years, you forfeit the last three months of interest. As a result, I-Bonds make the most sense if you typically hold a lot of cash in a savings buffer, but not for money you expect to spend soon.

Regulated utility companies typically petition regulators to allow them to price based on the cost of delivering their services, plus a reasonable return above that cost. Because of that pricing process, they tend to be able to provide fairly consistent (albeit not earth-shattering) returns, even as inflation rears its ugly head.

The key thing to watch out for is that, while that might work out over the long term, utility stocks are still stocks, and their day-to-day share prices are set by the market. As a result, they still provide no guarantee of any sort of short-term returns.

Energy pipelines and similar businesses focused on energy transportation typically earn the vast majority of their money from the amount of energy flowing through them, not the price of that energy. As a result, they, too, are well positioned to likely earn a fair rate of return over time even as inflation spikes.

In addition, pipelines tend to be one of the cheaper ways to transport energy (compared with methods like trucks or trains). Because of this, even if skyrocketing energy prices ultimately reduce energy demand, it is likely that pipelines will be less affected by it than other transportation sources.

ALSO READ: Investing in the Pipeline Industry

The reality is that we all have to eat, and very few of us produce enough of our own food to sustainably feed ourselves and our families. During inflationary times, people may cut back to just the basics in order to stretch their available money further, but there’s no getting around the need for sustenance.

Because they make the types of foods that people will gravitate to when money is tight, staple foods companies tend to be ones that offer reasonable prospects even in inflationary times.

It might seem counterintuitive, but when high-cost items get too expensive, people will often shift any discretionary money they have over to buying smaller, more personal luxuries instead. This is due to an economic theory known as the lipstick effect.

In essence, if people are not able to pay for large “fun” things like vacations, new homes, or new cars, they’re more likely to spend money on small fun things. That includes certain small, luxury-type personal care items such as lipstick, which is where the economic effect got its name.

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Many insurance policies are priced at least in part based on the value of the property they’re insuring. If inflation means that value is up, then it stands to reason that premiums will be higher, too. That relationship gives insurers an almost automatic path to increase their revenues in response to inflation.

Granted, claims by policyholders will also likely rise proportionally, as the risks being insured remain just as real as they were before inflation showed up. As result, insurance companies are likely to see reasonable -- but not necessarily stellar -- returns during inflationary times.

ALSO READ: How Do Insurance Companies Make Money?

Healthcare is one of those industries in which consumers tend to buy services because they have to, not because they particularly want to. That quality of the industry doesn’t go away just because there’s inflation. That so-called inelastic demand makes it likely that companies involved in healthcare have a decent shot of providing reasonable returns even during periods of high inflation.

Indeed, healthcare costs often rise faster than overall inflation. There’s no guarantee those pricing trends will continue, but to the extent that past is prologue and demographics are destiny, there are certainly good reasons to believe they could.

As rough as the market has been in the recent past, if inflation remains high, there are few choices other than to be invested to have a chance to stay ahead of rising prices. Over the long run, investments such as these offer decent structural reasons to believe they can keep pace with increasing costs. As a result, they give you a fighting chance to earn reasonable returns despite the challenges inflation will bring your way.

When you combine it with the reality that when inflation rears its ugly head, your cash becomes worth that much less, then the path forward gets clearer. Investing has risks, but being invested well will provide you with a decent opportunity to protect your purchasing power over time. With a long-term perspective and solid companies in critical industries at your side, you at least have a chance.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.