There are plenty of reasons to be concerned about stocks and the economy right now.

But if you’re like most folks, inflation is probably near the top of your list. And for good reason.

The U.S. government’s official data shows consumer prices surged at a 7.9% annual rate in February.

To put that into context, Americans haven’t seen the purchasing power of their savings plummet this quickly in more than 40 years, near the end of the devastating inflationary bear market of the 1970s.

Even worse, the factors that are driving inflation higher today – including excessive government “money-printing,” supply-chain disruptions, and structural energy shortages – appear unlikely to improve in the near term.

So despite repeated promises from the Federal Reserve and government officials that recent price increases were “transitory,” it’s doubtful inflation will return to reasonable levels anytime soon.

Fortunately, there are several simple and practical things we can do as both investors and consumers to protect ourselves – and potentially even profit – from high inflation.

This week, we’ll start with investing.

The idea here is fairly straightforward.

We want to avoid or limit our exposure to investments that tend to do poorly in inflationary environments.

But we also want to own more of the investments that tend to outperform in inflationary environments (and ideally, can still do well even if inflation begins to normalize).

Investments That Tend to Underperform during Inflationary Times

First up on the “avoid” list are bonds, particularly longer-dated bonds.

In very simple terms, rising inflation tends to cause upward pressure on bond yields (interest rates). Because bond yields and prices move inversely, this pushes bond prices down. And in general, the longer-dated the bond, the more sensitive its price is to rising yields.

In other words a 30-year U.S. Treasury bond will generally perform worse in inflationary environments than a 10-year U.S. Treasury note, which in turn will generally perform worse than a one-year Treasury bill.

For example, the price of 10-year Treasury notes has fallen a little more than 9.5% since inflation began to accelerate last summer. But the price of 30-year Treasury bonds has fallen more than 19% over that same period.

Folks who have held either of these securities have done poorly. But holders of the 30-year Treasury have done far worse.

So, you generally want to avoid owning bonds when inflation is high like it is today. This applies to both government bonds like U.S. Treasuries and corporate bonds issued by companies, with a couple of possible exceptions.

One exception is corporate bonds bought at a significant discount. (This can be very tricky for individual investors to do successfully; however, some of our newsletter affiliates do offer research on this strategy.)

The other possible exception is Treasury bills maturing in one year or less (and especially three months or less). These short-term securities are generally a safe alternative to holding cash directly. (More on this in a moment.)

The next asset you’ll generally want to limit during inflationary periods are speculative tech stocks (which include many of the most popular stocks in the market these days.)

These stocks tend to go gangbusters when inflation and interest rates are low, as we’ve seen firsthand over the past couple years.

But they can crater when inflation and rates rise sharply, which we’ve also seen over the past several months. Many of these stocks have fallen 50% or more from their 2021 highs.

One possible exception in tech is “GARP” stocks, which stands for “growth at reasonable prices.” These tend to be relatively mature technology companies with consistent profitability and free cash flow.

Now, this doesn’t mean you can’t or shouldn’t own any speculative stocks today. Depending on your risk tolerance and investment horizon, you may want to keep some exposure to these kinds of stocks. But I would urge you to be extra conservative and use good risk-management strategies if you do.

The final asset on the “avoid” list is large amounts of cash.

This should be obvious, but when inflation is surging, every dollar you hold in cash is consistently losing purchasing power.

So while it’s natural to want to sell everything and move entirely to cash when you’re worried, it’s generally a terrible idea when inflation is running high like it is today.

That said, I also think it’s a mistake to hold no cash at all.

That’s because cash has “optionality.” It gives you the ability to quickly and easily take advantage of buying opportunities in other assets that you can’t get anywhere else.

A simple solution is to hold a reasonable amount of cash and then “hedge” it against inflation by holding some gold – and perhaps a little bit of Bitcoin (BTC) – along with it.

As regular readers know, I can’t provide individual investment advice in this column. But holding somewhere around 10% to 20% of your total portfolio in cash, 5% to 10% in gold, and 1% to 2% in Bitcoin seems reasonable to me.

Investments That Tend to Outperform during Inflationary Times

Now, let’s talk about some investments that have historically done very well when inflation is high.

First up are commodities-related stocks.

These include companies that produce a wide range of resources whose values are highly correlated with consumer prices. These include energy, food and agriculture, precious metals, and industrial or base metals.

Next are stocks of companies with significant pricing power.

These tend to be in sectors like consumer staples and health care. Again, some mature tech stocks may qualify here as well. Not surprisingly, these also include many of the high-quality, dividend-paying “forever stocks” we covered earlier this month.

Real estate is another asset that tends to do well in an inflationary environment.

If you’re interested in making a physical purchase, cash-flow-producing rental properties and reasonably priced farm land (if you can find it) are generally good bets. But real estate stocks – particularly property REITs (real estate investment trusts) – tend to do well too.

Next, you might consider owning some high-quality value stocks.

These stocks didn’t really participate in the big bull market of the past several years. As a result, they have been all but forgotten by most investors. But history shows these stocks have often been among the best-performing assets when inflation is high.

Folks with a higher risk tolerance might also consider a small allocation to emerging markets.

Many of these countries are commodities exporters that benefit from inflation. They also tend to have lower production and labor costs, which is a boon when prices are rising sharply.

Finally, my last recommendation isn’t about a particular asset. Rather it’s about how you approach your investments in general.

If you’ve been reading Money Talks for long, you know I love the idea of owning high-quality companies for the long term.

But inflation and elevated market volatility tend to go hand in hand. So it can also make sense to devote a portion of your portfolio to shorter-term strategies at times like this.

That’s why I’m such a big fan of Mike Burnick’s new Dividends on Demand strategy that I shared with you last week.

Mike’s strategy provides the same level of safety you can get from owning the very best stocks for the long run. But it also allows you to consistently generate significant short-term payouts.

That’s it for today. Next week I’ll be back with some ideas you can use to take the bite out of inflation when it comes to your wallet.

As always, if you have any questions or comments on what we covered today, don’t hesitate to reach out to me at [email protected]. I can’t respond to every email, but I read them all.