Where to Put Your Money When Inflation Is on the Rise: 5 Expert Tips

Trying to time the markets is often a fool’s errand. If you need proof, just look at the ‘90s dot-com bust or the 2008 housing crash. But reacting to what you all-but-know is going to happen? That’s called being savvy. In December, the Federal Reserve released an economic forecast indicating it could raise interest rates as many as three times this year. And let’s face it — there’s only one direction for them to go at this point.

So the question to ask is, where is the best place to put my money right now, given these expected rate increases and the inflation that’s already eating into cash reserves? For insight, we reached out to several financial advisors to see what savvy investors should do. Here’s what they recommend.

1. Stock funds

Most investors who are at least a couple decades away from retirement are likely tilting their portfolios toward equities. Fortunately, holding a globally diversified basket of stocks happens to be a good place for your dollars when interest rates are likely to tick upward, says Elliott Appel of Kindness Financial Planning in Madison, Wisconsin.

“As inflation goes up, companies can pass along price increases to consumers, which adds to their earnings,” explains Appel. “Over time, that should drive stock prices up.”

Within the stock realm, some companies tend to fare better when rates edge upward. Financial institutions have historically done well, for example, as have commodities like corn and oil.

Carleton McHenry, a planner in Leavenworth, Washington, says ETFs can be a good way to gain exposure to those commodities, albeit indirectly. For instance, he owns the Energy Select Sector SPDR Fund (NYSE: XLE), which invests in some of the bigger names in oil and gas exploration, drilling, and energy-related services.

You’re not exactly treading new territory by diverting some of your assets to the fossil fuel industry right now — for example, XLE is up about 50 percent over the past 12 months, as of this writing. But McHenry sees a good possibility of that growth continuing for a while.

“I would take some from other areas that may be more growth-oriented like tech and reallocate into an area like this but keep overall exposure to 10 percent or less,” he says.

Not all commodities perform the same during a period of rising interest rates, so investors need to do their homework, cautions Stephanie McElheny of Aspen Wealth Strategies. “It’s important to research and analyze which might provide the most upside,” she says.

2. I-Bonds

When the price of goods starts climbing, investors often seek cover in the form of Treasury Inflation-Protected Securities, or TIPS. These government-issued bonds have a couple big advantages: they’re extremely safe and their principal increases with the Consumer Price Index, or CPI.

But there’s another government security that may be even more attractive right now: Series I Savings Bonds. Right now, I-Bonds are dishing out an attractive 7.12 percent rate on an annual basis. And, unlike TIPS, I-Bonds can’t decline below their initial value. “This is not the case for TIPS, which can lose principal in a deflationary environment,” says Greg Plechner of Greenspring Advisors in Paramus, New Jersey.

The rate on I-Bonds is adjusted twice a year based on changes to the CPI. In the recent past, that hasn’t resulted in staggering payouts. But with consumer prices continuing to soar, the payout on these federally-backed notes is starting to turn heads.

Plechner also likes the fact that you can defer paying tax on your interest income until final maturity — that is, in 30 years — or when you choose to redeem your bonds. You can exclude interest from your income altogether if you use it for higher education expenses.

Series I bonds aren’t without their limitations, however. You can only electronically purchase $10,000 a year from TreasuryDirect — or $5,000, if you use your tax refund to buy them in paper format.

They’re not very liquid, either. Once you’ve purchased your bonds, you can’t access that money for a full year. And if you decide to sell them before within five years, you’ll face a 3-month interest penalty.

Still, if you have money that you know you won’t need for a little while, that’s a relatively small drawback right now. “It’s worth it compared to what savings rates are right now,” says Derek Hensley, an advisor with Sound Stewardship in Overland Park, Kansas.

3. High-Yield Bonds

Most corporate bonds pay a fixed interest rate until maturity, which can leave you locked into wimpy returns during a period when the Fed is expected to lift rates. But there are a couple ways to navigate around that financial morass.

One way to increase your potential interest payment is by homing in on shorter-term bonds, says Ed Schmitzer, president of River Capital Advisors in Jacksonville, Florida. Once they mature, you can use the money to invest in new bonds, which will typically offer a more compelling return after a Fed rate hike.

You can juice your potential payout even more by investing in high-yield bonds — sometimes dismissed as “junk” bonds. As the name implies, high-yield bond issues provide a more generous interest rate than other forms of debt. There’s a reason for that — they’re offered by companies with lower credit ratings or a shorter borrowing history, so there’s more risk of them defaulting.

But Schmitzer explains that the level of risk is proportional to the maturity date. So if you focus on the shorter end of the maturity spectrum, you’re on safer ground. “The potential is better that principal and interest will be paid over a two- to four-year time period,” says Schmitzer.

Another option for investors looking for a better-than-average return are senior loans, says Jay Lee, founder of Ballaster Financial in Jersey City, New Jersey. In the event of a bankruptcy, issuers have to pay off these obligations before their high-yield bonds, making them a good fit for more risk-averse investors. Senior loans also come with a floating interest rate, so they help families keep up with rising rates and inflation.

4. Floating-Rate Bonds

Another option for investors looking to keep up with inflation? Floating-rate bonds that are issued by corporations or government-sponsored enterprises (GSEs).

Fixed-rate securities are great when rates across the economy are stable or dropping—not so much when newly issued bonds are offering beefier payouts. Floating-rate bonds, or “floaters,” are different. Their interest rate changes based on a specific interest rate benchmark. So as rates in general creep up, so too does the coupon rate you’re getting from the bond.

Appel cautions that because floaters are a smaller subset of the bond market, investors really need to do their homework before making a purchase. “Each bond is different, which means you should research the credit quality and the interest adjustment is calculated,” he says.

One way to mitigate your risk is by purchasing ETFs that invest in these specialty bonds, adds Appel. By spreading your exposure across multiple issuers, you won’t get rolled if one of them happens to default.

5. REITs

The U.S. housing market was absolutely on fire in 2021, and many economists are predicting continued price growth — albeit at a slower pace — in the new year. But owning your home isn’t the only way to take advantage of soaring prices.

Another option is diverting part of your portfolio into a real estate investment trust. REITs pool money from multiple investors, which they use to purchase income-producing properties or mortgages. Depending on the REIT, it could represent a basket of apartment units, retail properties or health care facilities. By law, they’re required to pass at least 90 percent of their taxable earnings onto investors in the form of dividends.

According to McElheny, REITs can be an effective hedge during periods when consumer prices are climbing. “In a rising-inflation environment, rents typically tend to increase and landlords are able to charge more,” she says. Much of that extra income is then distributed to shareholders.

That’s not the only way in which REITs counter the effect of inflation, says McElheny. Over time, inflation erodes the value of any long-term debt that the trust is carrying. If, for example, a particular REIT carries $1 million of loans today, in ten years the value of that debt would be lessened due to the impact of rising prices.

Certainly, current economic conditions are going to benefit some REITs more than others. That means investors need to be careful about which segments of the real estate market they’re targeting. Wells Fargo, for instance, now has a “favorable” rating for real estate funds that focus on apartment and single-family homes, but an “unfavorable” designation for office, health care and lodging REITs.