As Americans struggle with high inflation rates, many seek strategies to compensate for the increasing expenses. One option may be to change your investment portfolio, but is this necessary? And if it is, what modifications should you make? Let’s look closer at this issue.

What Is Inflation?

To adjust your investment portfolio that accounts for inflation, it is first important to understand exactly what inflation is. Inflation is a general increase in prices and fall in the purchasing value of money, according to Brooks Macdonald. This means that as inflation increases, each dollar you have will buy less and less.

How Does Inflation Affect Your Investments?

Investments are not immune to the effects of inflation. Over time, the purchasing power of your investments will decrease if they do not keep pace with inflation. This is especially true for investments that pay fixed returns, such as bonds. For example, let’s say you have a bond that pays 5% annual interest. If inflation rises to 6% over the year, your investment’s actual return — or return after accounting for inflation — would be negative 1%.

On the other hand, some investments can benefit from rising inflation rates. These include commodities and stocks of companies that tend to do well when prices rise. For example, suppose you own shares of a company that produces consumer staples like food or toilet paper. In that case, that company will likely see increased demand (and profits) during periods of high inflation.

Of course, no investment is guaranteed to perform well in all inflationary environments. For this reason, it is important to have a diversified investment portfolio with a mix of asset classes that can perform well in different economic conditions.

Should You Adjust Your Investment Portfolio for Inflation?

There is no easy answer to this question. Some investors choose to make adjustments to their portfolios in an attempt to protect against the effects of inflation. In contrast, others believe that the best strategy is to ride out the waves of inflation and hope for the best.

If you decide to adjust your investment portfolio for inflation, you can use a few different strategies. One option is to invest more heavily in assets that tend to do well in inflationary environments, such as commodities and stocks. Another possibility is to invest in TIPS, which are U.S. Treasury bonds that offer protection against inflation.

Ultimately, the decision of whether or not to adjust your investment portfolio for inflation is a personal one. There is no right or wrong answer, and you should make the decision you feel most comfortable with.

What If You Don’t Adjust Your Portfolio?

If you choose not to adjust your investment portfolio for inflation, there is still a chance that your investments will do well — even in an inflationary environment. This is because, over time, many investments have the potential to grow at rates that exceed the rate of inflation.

For example, if you have a stock that pays a dividend of 3% and inflation is at 2%, your real return would still be positive at 1%.

There are no guarantees when it comes to investing. Even if you don’t make any adjustments to account for inflation, there is always a chance that your investments could underperform and lose value. This is why it’s important to remember that investing is a long-term game, and you should not expect to see immediate results.

High inflation rates can eat away at the purchasing power of your investments — but by making some strategic adjustments to your investment portfolio, you can offset these effects. Commodities and stocks of companies that produce consumer staples are two examples of asset classes that tend to do well during periods of high inflation. However, before making any changes to your portfolio, you should speak with a financial advisor who can help you make decisions based on your unique circumstances and investment goals.