When an economy is in stagflation, there's usually a general consensus that opportunities for financial gain aren't as abundant as they may have been during more optimistic times. After all, stagflation is commonly defined as an economy in which high inflation has existed for a prolonged period and high unemployment has hampered the optimism of consumers. However, there may be rewarding investment opportunities for those who are willing to seek out long-term rewards. Knowing what to avoid is just as important as what to seek out during these times!
A careful risk assessment is essential during times of stagflation. Understanding your own risk tolerance and avenues for avoiding near-certain losses from savings and money markets is essential in order to ensure that your investments continue to grow.
Avoiding the Downside of Stagflation
During stagflation, it is not uncommon for individuals with savings accounts to suffer due to the fact that currency inflation diminishes the value of their low-yield investments. For lack of a better term, "parking" money in savings accounts to avoid volatility will not help investors shield themselves from the side effects of stagflation.
Fixed-income investors will also find that they need to diversify and expand their investment strategies in order to ensure that their allotted income allowance doesn't reduce in terms of spending power when inflation kicks in.
Comparing Investment Risk
Since we acknowledge that traditionally safe, low-yield investments such as a savings account cannot shelter your funds from inflation, the only way to counter the depreciation of your savings is to choose investment vehicles which offer returns at a percentage rate beyond the inflationary rate. One possibility is the stock market.
The stock market is a perfect example of an investment which, traditionally, introduces far more risk to investors than savings accounts or bonds. That being said, given the near-certainty of financial loss from savings accounts and money market accounts, the risk of investing in specific stock sectors likely to continue generating profit during stagflation may become far more tolerable. While there is no guarantee that investing in stocks can offset the effects of stagflation, it is nevertheless one tool for seeking out profits in a difficult environment.
Watching Specific Stocks
Historically, the categories of stocks which offer the greatest chance of gains during stagflation include health care, food, energy and utilities. The continued global demand for energy often means that foreign nations will continue to purchase from global suppliers even if the U.S. domestic economy is faltering. With this in mind, large, publicly listed energy companies may continue to provide high levels of yield during domestic economic troubles.
Food is yet another example of a global staple which will continue to be in demand regardless of domestic stagflation. With that in mind, large U.S. food manufacturers are likely to be another safe bet to invest in. Generally speaking, any stock related to companies which offer products or services in "necessities" will likely fare better than companies catering to consumer interests, such as technology and entertainment.
Moving Forward With Your Investments
Stagflation doesn't last forever. However, like any period of economic growth or decline, there certainly is no fixed duration for such a phenomenon. As an investor, the one question you must ask yourself is as follows: Are the losses you would incur waiting out stagflation in a savings or money-market account more tolerable than the potential losses incurred through investing?
There is no right answer to this question – it is personal and unique to all investors. However, taking the time to sincerely ponder this will help you develop your own investing strategy if and when stagflation occurs again.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.