Even with rising interest rates, many parts of the economy are still seeing inflation. In an inflationary environment, people look at their investments and cash and wonder if they are still investing their wealth in ways that give them protection against inflation

While people often talk about whether a particular savings account or investment “keeps up” with inflation, the truth is that low-interest savings accounts very rarely generate enough interest to withstand the loss of buying power, considering the recent inflation numbers and average savings account rates. Instead, investing is a great way to help your savings keep up with inflation. We cannot know the future, but based on historical data, there are some investment strategies that historically performed well during periods of inflation. 

Let’s look at a few of these strategies to see what factors make them more or less effective for your long-term and short-term goals.

How inflation affects stocks

One of the most effective strategies for strong returns on your investments is to invest in low-cost index funds and hold them for a long time. This is the core of the strategy behind Wealthfront’s automated investing products. 

Over the long term, stocks and index funds offer strong potential growth even in an environment of inflation. However, in the short term, stocks can be volatile, and trying to time the market can result in investments that don’t outpace returns found in passively managed portfolios. Buying stocks consistently and holding stocks long term, through periods of both high and low inflation, is one of the most reliable ways to achieve returns over time that outpace inflation’s effects.

For investors looking to mitigate risk during volatile markets, implementing a dollar-cost averaging strategy can offer a strategy to spread out your investment timing and therefore avoid investing all your funds before potential downturns. By dollar-cost averaging rather than trying to time the market, you periodically invest a set amount of money no matter the current market. Dollar-cost averaging can enable investors to mitigate the effects of market volatility, potentially resulting in gains over the long term even when market averages are stagnant or decline in the short term. We crunched the numbers on investing in equities during inflation and found that even during two high-inflation periods of economic history, stagflation in the 1970s and the dot-com bubble burst of the early 2000s, dollar-cost averaging and investing in low-cost index funds still left investors with positive returns relative to inflation. 

A steady approach to investing in low-cost index funds like those in the Wealthfront Automated Investing Account portfolios allows for long-term investing that captures the overall upward trajectory of the market despite occasional downturns. The inflation-adjusted returns on the S&P 500 over time show that, historically, even investing during times of inflation eventually shows gains that beat inflation and grow your returns. 

How inflation affects real assets

Real assets, like real estate, change in value in response to supply and demand. Even in an inflationary environment, a real asset like a home might increase in value if there are too many interested buyers and a low inventory of homes. 

Inflation does make it harder to buy real assets in the sense that your down payment savings might not go as far. However, some homeowners may benefit from having locked in a low-interest rate in the past, prior to an inflationary period. For instance, homeowners who purchased a home with a fixed-rate mortgage when rates were less than 3% might find that they have a relatively low-cost home payment set up for the next 30 years even if rates and inflation soar. With lower housing costs than others with similar incomes, homeowners may have room to save more since they aren’t having to pay current market rates for housing.

Another challenge comes if you choose to see real assets as an investment vehicle, such as rental properties. Owning individual rental units can be a risky strategy because the market can change and your rental income isn’t guaranteed; if you only invest in rental properties, your investments aren’t diversified and you’re depending on those properties continuing to draw in renters at the rental rate you need. Rental properties also don’t tend to offer liquidity; if you value being able to move your money around, real assets might not be the most suitable approach.

How inflation affects cash

Cash is affected by inflation; it loses value and buying power when it isn’t earning anything. If you want to retain the ability to spend your cash easily and reduce the impact of inflation, uninvested cash can be placed in a high-yield account like the Wealthfront Cash Account, designed for short-term savings until you’re ready to invest. However, even a very high APY like 5.00% cannot always fully offset high inflation, which is why the better strategy to use during inflation is to continue to invest funds you won’t need for at least 3-5 years. 

The assets you keep in cash might include the money you need for everyday bills, a 3-6 month emergency fund, and funds for upcoming purchases in the next year. The rest of your wealth can weather inflation better, according to historical data, when it is invested in a diversified portfolio in the stock market and across asset classes, like the ones available in the Wealthfront Automated Investing Account

How inflation affects bonds

The bond market is typically considered less risky than the stock market, but with lower risk, you typically see lower returns. When you invest in bond ETFs through a product like the Wealthfront Automated Bond Portfolio, you can diversify your holdings and risk while experiencing better liquidity than with individual bond purchases.

When you know that you’ll want to use your money in the medium term, such as in the next 1 to 3 years, or you want yields that are potentially higher than a Cash Account but with very low risk, investing in bond index funds can be a nice additional option for where to invest.

While bonds aren’t guaranteed to keep up with inflation, the answer to “Are bonds a good investment during inflation?” can be yes, particularly if you want your portfolio to have a relatively low level of risk. 

Keep investing in a diversified portfolio built to weather all market conditions

There are certain times, such as during a recent job loss or a major source of new expenses, when it makes sense to invest less and hold more cash, but a time period of inflation isn’t necessarily one of them. Rather, it’s usually wiser to stay the course, continuing to invest regularly so that your money will reap long-term returns.

Those long-term gains are possible when you don’t frequently move your money around chasing a particular short-term change in the market, even a change like inflation. The Wealthfront Automated Investing Account offers a diversified portfolio and is built to help your money weather changes in the short-term market while working toward the long-term goal of building wealth over time. 

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The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.


Investing in bond ETFs involves risks, including tracking error, credit risk, interest rate risk, liquidity risk, and the possibility of incurring capital gains taxes during the fund’s rebalancing. Unlike individual bonds, bond ETFs do not provide a fixed maturity date or guarantee of principal repayment at maturity. Investors should carefully consider these risks before making investment decisions. Past performance is not indicative of future results.


The Annual Percentage Yield (APY) for the Cash Account may change at any time, before or after the Cash Account is opened. The APY for the Wealthfront Cash Account represents the weighted average of the APY on the aggregate deposit balances of all clients at the program banks. Deposit balances are not allocated equally among the participating program banks.


Cash Account is offered by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), a Member of FINRA/SIPC. Neither Wealthfront Brokerage nor any of its affiliates are a bank, and Cash Account is not a checking or savings account. We convey funds to partner banks who accept and maintain deposits, provide the interest rate, and provide FDIC insurance. Investment management and advisory services–which are not FDIC insured–are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and financial planning tools are provided by Wealthfront Software LLC (“Wealthfront”).


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About the author(s)

The Wealthfront Team believes everyone deserves access to sophisticated financial advice. The team includes Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), a Certified Public Accountant (CPA), and individuals with Series 7 and Series 66 registrations from FINRA. Collectively, the Wealthfront Team has decades of experience helping people build secure and rewarding financial lives. View all posts by The Wealthfront Team

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inflation, investing