Where to Invest When Inflation is High and Growth is Low

Discover the concept of stagflation and learn how to protect your finances

The scenario of stagflation is a period when inflation remains high while economic growth is slow.

For investors, understanding where to place money safely and strategically is essential!

Understanding the economic context

When inflation is high, the cost of living rises quickly, pushing up prices for food, energy, and rent, which impacts purchasing power.

At the same time, low growth means companies may not generate strong profits, reducing the performance of stocks and funds that depend on economic expansion.

The Federal Reserve usually reacts by adjusting interest rates. Higher rates can curb inflation by making borrowing more expensive, which further slows growth.

Investors understand that the most traditional asset choices need to be reconsidered.

Assets that preserve value

In times of high inflation, it is crucial to prioritize assets that preserve value, even if they don’t offer explosive gains. The most tangible examples are:

• Inflation-indexed bonds (TIPS): Treasury Inflation-Protected Securities adjust the principal according to inflation. This protects the investor’s purchasing power, ensuring that real returns are not eroded by rising prices.
• Gold and precious metals: Historically, gold has acted as a safe haven during periods of economic instability. Although it does not generate passive income, it tends to hold its value in inflationary environments and even in international crises.
• Real Estate Investment Trusts (REITs): Some properties can be inflation-adjusted, especially those linked to residential or commercial rents. It is important to assess the quality of the portfolio and the location of the properties in the U.S.

Even if these assets do not offer rapid growth, they help protect capital against value loss.

Investments with steady income flow

A strategy that works is to prioritize investments that generate consistent cash flow.

Even if the asset price does not increase significantly, the income can offset the loss of purchasing power caused by inflation.

• Stable companies often pay regular dividends, and brands in utilities and food sectors can continue distributing them even during slow growth.
• Corporate fixed-income funds may offer periodic interest payments from solid companies.
• Rental properties, though requiring active management, provide monthly income that can be adjusted for inflation.

The key here is to prioritize safety and consistency, rather than aggressive capital gains.

Geographic and sector diversification

When domestic growth is weak, it makes sense to consider international exposure, seeking countries with faster growth through global funds or international ETFs, for example.

By sector, recession-resistant industries such as healthcare, utilities, consumer staples, and telecommunications tend to have lower volatility.

In America, companies that provide essential goods and services typically maintain consistent revenues, even when overall growth is limited.

Considering liquidity and flexibility

During times of economic uncertainty, it is essential to keep part of the portfolio in liquid assets.

Having quick access to cash allows you to seize unexpected opportunities and handle emergencies. Some good options are:

• High-yield savings accounts: Though returns are modest, they offer safety and quick access.
• Short-term Certificates of Deposit (CDs): In the U.S., CDs can offer higher interest than traditional savings while keeping liquidity in shorter terms.
• Money market funds: Protected and liquid, they are useful for temporarily parking capital.

Maintaining liquidity does not mean ignoring long-term investments, but rather balancing risk with the need for immediate access.

Protection against risks and inflation

Regularly review your portfolio, making adjustments in response to changes such as interest rate shifts.

For international investors or expatriates, protecting against U.S. dollar fluctuations is crucial. ETFs and currency contracts can help.

It is also important to have tax planning in place, since investments are treated differently for tax purposes, and you need to understand the specific rules regarding investment taxation.

Financial education as an ally

Financial education is a strategic advantage to understand how inflation impacts different types of investments.

Learning how compound interest works and how to allocate resources between fixed income, equities, and tangible assets is crucial to making smart decisions.

Study local products like TIPS, REITs, and tax-advantaged investment accounts (such as IRA and Roth IRA), as well as follow economic indicators like CPI (Consumer Price Index) and Federal Reserve interest rates.

Written by

Gabriel Gonçalves