Can stagflation affect my investments?

Trump's tariffs appear to be on the verge of causing stagflation in the world economy

Make sure that your investments can withstand a global downturn.

At its foundation, investing is putting your money to work in order to produce growth over an extended period of time, with the gains (ideally) outpacing inflation. But how can you make investments when inflation is high and growth is either nonexistent or very slow?

When rising inflation and stagnant growth coexist, it can lead to stagflation. The two are conceptually opposite in economics: high inflation typically results in higher growth because of increased demand for goods.

This is why central bankers and politicians find stagflation to be a challenging problem. However, it is also a difficult moment for investors who are attempting to choose which stocks and funds to buy. When there is stagflation, stock markets generally decline, which makes index fund investing risky.

Nonetheless, investors must get ready for just such a scenario. Nearly a century of increasingly globalized trade has been threatened by US President Donald Trump's Liberation Day tariff scandal since April 2. This could raise the cost of goods while simultaneously slowing economic growth. Some even worry that a US recession might result from the tariffs.

"It's hard to know where to invest in this situation," says Rob Morgan, Charles Stanley's chief investment analyst. Most companies will encounter additional obstacles like increased expenses, problems with the supply chain, and doubts about the return on any investments they make.

But the old guidelines are still in effect. Time usually works in your favor if you invest in high-quality companies.

In order to give your portfolio the best chance of success during a period of stagflation, we examine the important factors you should take into account.

Invest in the long term when there is stagflation.

The first thing to keep in mind is that, despite having survived several stagflationary periods, the stock market has historically been among the greatest places for investors to place their money over the long run.

In 11 of the past 50 years, including the Great Financial Crisis and the .com bubble, the SandP 500 has produced negative full-year returns.

Remembering that economic downturns are usually temporary is crucial when markets drop sharply, as they have recently.

According to Brian Byrnes, head of personal finance at Moneybox, "it can be unsettling for investors to see their investments lose value, but in times like these it's important to remember the long-term nature of investing." "The markets have previously experienced this level of volatility and recovered.

Naturally, people who are nearing retirement may be concerned about how a market selloff would affect their pension. In theory, though, as you get closer to retirement, your pension manager will have moved your allocation toward more defensive assets, protecting your pot from the worst effects of the drawdown.

Is it possible to protect against stagflation using defensive assets?

As an inflation hedge, defensive assets are also worthwhile.

Defensive investing is based on the idea that these investments will move against the direction of the stock market.

Investing in defensive sectors may be necessary if you wish to maintain your attention on stocks.

Morgan claims that certain industries are inherently more resistant to economic downturns. For example, utilities, healthcare, and food and drink, since they account for a larger portion of necessary rather than optional spending.

Bonds have historically been seen as a defensive asset that can protect portfolios from a decline in the stock market. This isn't always the case in the current climate, as Trump reversed course and paused the reciprocal tariffs for 90 days after they caused the US bond markets to plummet.

Additionally, there is the argument that inflation will reduce bond returns during a stagflationary period.

Considering that gold has long been a safe haven asset during economic downturns, it might be a safer option. Since it pays no interest, it is less affected by inflation than bonds, but as events unfold, it may still draw interest from investors.

Johanna Kyrklund, group chief investment officer at Schroders, says, "We still like gold because it benefits from both more structural risk posed by rising debt levels and weaker growth."

"This year's infusion of uncertainty into financial markets has already caused gold to reach record highs," Monk says. "When other assets are susceptible to declines, the metal has a history of holding its value and tends to perform best when fear is at its highest.

When investing during stagflation, seek out reputable businesses.

It is generally advised to seek out "quality" companies with solid fundamentals that can withstand the stagflationary storm if you are determined to stick to stocks and prefer to choose individual stocks over tracker funds or exchange-traded funds (ETFs) that track a defensive sector.

That usually refers to businesses with sound balance sheets and minimal debt.

"Avoiding weaker businesses that are less likely to withstand a significant downturn is sensible," Morgan says. Avoiding weaker companies that are less able to survive a major downturn makes sense.

"An economic moat surrounds some companies. Offering a distinctive product, controlling market share with an excellent product, or having well-established distribution channels are a few examples. The strong will probably get stronger in these conditions because it is difficult for new competitors to break into the market.

Looking for businesses that pay dividends could be another tactic. Your overall returns are increased by regular dividends, even in times of market decline.