How to protect your portfolio from inflation

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Photo by Spencer Platt/Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.Inflation has the same effect on your portfolio that termites do on a wood-frame house: it gnaws away unnoticed until the beams start to give.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountU.S. investors used to fight back against the pest of inflation with the classic 60/40 portfolio, owning stocks for growth and bonds for ballast. Then 2022 happened. Stocks and bonds fell together as inflation soared to its highest level since the early 1980s, leaving savers with no safe way out.Inflation is among the top of investors’ worry lists in the third quarter of 2026, according to a Charles Schwab survey. More than half of active-trader participants said they expected it to have the greatest impact on the direction of the U.S. stock market through the end of 2026. Angst about price increases and economic uncertainty has driven long-dated U.S. Treasury yields to the highest in decades.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againThe lessons of 2022 left both investors and advisers rethinking how to prevent the bite. Instead of relying on a traditional mix of assets, wealth managers say their clients are now adding shorter-duration bonds, commodities, infrastructure and other alternative investments to spread the risk in a downturn.“If you only have stocks and bonds, you have two legs on your stool,” said Emily Green, head of wealth management at Ellevest.Here’s how to build a more durable defense against inflation right now.Strengthen your coreThe meat of your stock portfolio — 80 per cent to 90 per cent — should still be in broad-market funds, such as those tracking the S&P 500 Index, said Omar Qureshi, managing director at financial planning firm Hightower Signature Wealth. The remaining share can be in more targeted investments.Set-it-and-forget-it investors have had great gains over the last 10 years despite inflation’s surge in 2022. S&P 500 companies’ earnings are projected to grow 23 per cent in the third quarter of 2026 compared with the same period in 2025, data compiled by Bloomberg Intelligence show. If that projection holds, it represents an unusually strong pace of profit growth and far outpaces inflation over the same period.That protection has been less reliable during periods of high inflation. Stocks outpaced inflation 90 per cent of the time when inflation averaged below three per cent and was rising, but failed to do so consistently when inflation averaged above three per cent, according to research by Schroders Investment Management. As of August 2026, U.S. consumer prices were up 3.4 per cent from a year earlier.When inflation is higher, investors making targeted bets may want to focus on companies that can raise prices or rents without losing customers. Qureshi points to energy producers with oil and natural gas reserves, mining companies that own mineral deposits, farmland and timberland owners as well as commercial real estate with leases that reset at higher rents.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Energy stocks, for example, returned more than 60 per cent in 2022 as Russia’s invasion of Ukraine sent oil and natural gas prices soaring. In 2026, energy stocks have again benefited from the rise in oil prices, while stocks in semiconductor equipment advanced due to artificial intelligence-driven investment.Equity real-estate investment trusts (REITs) could also provide a partial inflation hedge by passing through price increases in rental contracts and property prices, according to Duncan Lamont, head of strategic research at Schroders Investment Management.(1) Consumer staples may also perform relatively better, he added, as their cash flows are concentrated in the shorter term and less impacted by inflation.Package TIPS across maturitiesTIPS, a type of Treasury security designed to keep pace with inflation, have long been one way for investors to protect their money. ETF issuers are now taking the idea further.One of the most affordable options is the Vanguard Total Inflation-Protected Securities ETF (VTP), which charges a 0.05 per cent expense ratio. Launched in 2025, the fund holds TIPS with a range of maturities, spreading investors’ exposure across shorter- and longer-term bonds. That gives investors a simpler way to diversify their inflation protection than buying and managing individual bonds.Some funds take a more hands-on approach, with managers adjusting their holdings as conditions change. The PIMCO Inflation PLUS Active Exchange-Traded Fund (PCPI), launched in April, charges an expense ratio of 0.25 per cent and holds not only short-term TIPS but also other inflation-linked securities and interest-rate swaps.Wes Crill, senior client solutions director and vice president at Dimensional Fund Advisors, said inflation swaps — contracts that pay based on changes in consumer prices — give investors more flexibility because they don’t have to rely solely on Treasuries for inflation protection.“The nice thing about using a swap is the bonds that are in your portfolio don’t have to be just Treasuries. You can take some credit exposure using corporate bonds, you can use more tax-efficient municipal bonds,” said Crill. “It really opens a door to a whole gamut of fixed income asset allocation.”For investors who prefer a simpler approach, Northern Trust’s distributing ladder ETFs buy bonds that mature over a defined period and gradually pay out principal and interest. And if you’re sticking with traditional bonds, shorter maturities may still offer the best balance. Stash Graham, managing director and chief investment officer of Graham Capital Wealth Management, favors fixed-income investments with roughly a five- to 10-year time horizon because they’re less exposed to swings in interest rates.While interest payments and principal gains from TIPS are exempt from state and local income taxes, they are subject to federal income taxes. Inflation adjustments are also taxed each year, even though investors don’t receive that money until they sell or the bond matures, creating “phantom income.” Holding TIPS in an IRA avoids that annual tax hit, making it an especially attractive strategy. Holding the bonds to maturity guarantees inflation-adjusted principal, but investors can also sell them earlier to capture capital gains.Buy some real stuffTangible assets are the ultimate hedge, provided you have the funds.Hightower Signature’s Qureshi recommends owning storable commodities such as copper as well as infrastructure such as toll roads, bridges, airports and cell towers. Many of these assets generate revenue through long-term contracts that can be adjusted for inflation, allowing owners to pass higher costs on to customers.“You could buy a hydroelectric dam. You could buy a data centre and lease it out. You could own a pipeline and charge on the volume of the contracts going through,” he said. “They’re boring, but you can’t have an economy run without them.”Ellevest’s Green recommends private real estate, infrastructure, venture investments and private debt to her clients to diversify their portfolios. Rather than buying individual assets, clients invest as limited partners in private-market funds selected by the firm. The tradeoffs include high investment minimums, higher fees and restrictions that can lock up capital for years.Another consideration: taxes. Investors may need to have a long investment horizon, typically five years or more, to hold real assets due to limited liquidity and the assets’ tie to economic cycles. Tax treatments depend on the structure of the funds carrying the real assets.Because buying infrastructure outright isn’t realistic for most people, investors can get similar exposure through publicly traded ETFs. Todd Sohn, chief ETF strategist at Baird Strategas, points to products such as WisdomTree Inflation Plus ETF (WTIP), which launched in 2025 and combines TIPS with industrial metals and agricultural commodities in a single portfolio.Inflation protection isn’t about owning everything. Ask advisers how much belongs in alternatives and the answer is usually the same: enough to diversify, but not enough to overwhelm the portfolio. Green said she typically recommends allocating five per cent to 30 per cent, depending on the individual’s goals. And Dimensional’s Crill cautions that many commodities, energy stocks and cryptocurrencies are far more volatile than inflation itself — a reminder that protecting against inflation doesn’t mean chasing every possible hedge, but building a portfolio sturdy enough that a little gnawing doesn’t bring the whole house down.(1) As opposed to mortgage REITs, which may suffer because inflation can reduce the value of the fixed payments they receive from mortgage investments.(2) A note that this fund can allocate up to 10 per cent of its assets to Bitcoin exchange-traded products and futures, depending on market conditions.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.