Investing During Inflationary Times

The Federal Reserve began aggressively hiking interest in 2022 to tame inflation. While those rate cuts successfully brought down inflation from a peak of 9.1% in June of 2022 to 3.5% in March of 2024, it still hasn't reached the Fed's 2% target.1

In other words, while inflation has slowed, consumers aren't out of the woods yet. Inflation is still here, and the Federal Reserve likely won't lower interest rates and hasn't ruled out increasing them.

Understanding this economic landscape is crucial for anyone who has worked hard to build wealth. Working with a financial advisor who understands your unique financial situation and goals may ensure you're prepared to weather economic ups and downs, including inflation.

To shed light on managing your investment portfolio during inflationary times, we talked with Certified Wealth Strategist and Synovus Senior Director of Private Wealth, D. Brent Suriano, for insights.

Investing in an Inflationary Environment

Inflation can be particularly concerning as it erodes the real value of your savings.

For years, the go-to strategy for maintaining and growing a retirement nest egg has been a 60/40 portfolio: 60% in U.S. stocks and 40% in bonds.2 The theory: Owning stocks helps grow wealth in good times, while bonds cushion the blow when stocks have a bad year.

Yet this strategy has taken a beating in recent years as high inflation and high interest rates have hurt the prices of both stocks and bonds.3

That's because stocks and bonds react in the same way to a combination of high inflation and high interest rates — both go down. And it's not clear if the economy will come out of the inflationary woods any time soon. In May 2024, Federal Reserve Chair Jerome Powell indicated at a press conference that future rate hikes are unlikely but wouldn't entirely rule them out.4

When faced with high inflation, lower returns and greater economic uncertainty, it's hard for some investors to resist a knee-jerk reaction to completely overhaul their portfolio.

Suriano urges investors to resist this knee-jerk reaction. "Instead, investors should step back and evaluate their current portfolio and long-term goals — with the help of a financial expert," he says.

Rethinking What It Means to Have a Diversified Portfolio

With the 60/40 portfolio appearing to have lost its safe bet, investors need to rethink what it means to have a diversified portfolio.5

According to Suriano, true portfolio diversity isn't just about being diversified within your stock and bond holdings.

"True portfolio diversity means diversifying across asset classes," he says. "Ideally, you'd be holding about one-third cash and cash equivalents (e.g., certificate of deposits (CDs) and treasuries), one-third marketable securities (e.g., stocks, bonds, ETFs) and one-third non-traditional assets (e.g., real estate, commodities, precious metals, business interests)."

The value of this approach, he adds, is that two of these asset classes will typically do well in most economic environments. With high inflation, for example, interest rates tend to be higher, which means cash equivalents that are drawing interest will typically perform well, as will real estate and commodities, where prices tend to be driven up by inflation.

Here are some of the investment alternatives — and how they might be impacted by inflation:

• Real estate. Real estate investments might serve as a hedge against inflation, as property values and rents often increase with rising prices. Real estate investment trusts (REITs) can benefit from inflation and high interest rates. However, a REIT's performance may be closely tied to the decisions of the management team and its ability to generate rental income. Poor management decisions can negatively impact their performance.


• Commodities. Investing in commodities like gold, oil, grains and natural gas can be a way to hedge against inflation because inflation tends to boost prices. However, these markets are highly volatile and influenced by global factors beyond inflation.


• Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds specifically designed to protect against inflation. While they offer a direct hedge against inflation, their return potential might be lower compared to more aggressive investments.


• Cash. When interest rates are low, investors typically seek to minimize cash in their portfolios because it doesn't offer attractive returns. However, when interest rates are high, CDs, money market accounts and cash equivalents such as Treasury bills may provide higher yields than longer-dated bonds.


• Mutual funds and Exchange-traded funds (ETFs). Because mutual funds and ETFs are collections of securities, including stocks, bonds, cash and other assets, they can be a smart diversification tool for any investor. However, mutual funds often come with high fees to cover management and other fund operating costs. Compared to ETFs, though, keep in mind that mutual funds come with higher underlying fees for active management and other operating costs.

Remember, there are no silver bullets when it comes to investing. You need a combination of investments and asset classes to keep up with the impact of rising interest rates and inflation and provide potential returns.

Managing Your Portfolio

Diversification5 remains a key strategy in managing investment risks during inflationary times. Balancing different types of assets can help mitigate the impact of inflation on your portfolio.

"Ideally, you've been working with a financial advisor for some time and already have a sufficiently diversified portfolio in place," says Suriano. "Then you and your advisor can work together to tweak your holdings in each asset class to optimize it for the current economic conditions and your financial goals."

Suriano stresses that financial plans aren’t static. You don't set and forget for the next five years. You'll want to reevaluate your approach as market conditions change. And you'll want to have tactical conversations about what happens to your portfolio under different conditions — for example, if inflation hits 5% or more. Plus, your portfolio will need periodic review and rebalancing to help ensure the investments still align with your tolerance for risk and your targeted allocations.

But wherever you are on your journey, it's not too late to seek professional help, says Suriano.

"Here at Synovus, our financial advisors will meet your where you're at, and can dig deeper with you through individual conversations about current market conditions and your own personal situation and goals."

Staying informed about economic trends. Understanding how they impact your investments is an essential part of being an informed investor. But remember, you don't have to do it alone. Consult with a financial advisor to help ensure your investment strategy remains aligned with your financial goals, no matter the changing economic landscape.