11-18-2025
When inflation spikes, investor optimism about returns often outpaces reality. In a new paper titled “Inflation and Trading” published in the Journal of Financial Economics, the Daniels School’s Michael Weber and co-authors Philip Schnorpfeil and Andreas Hackethal of Goethe University Frankfurt, the core finding is that beliefs about how inflation affects asset prices are notably disparate and, on average, overly optimistic for stocks during inflationary periods.
Investors, Weber notes, become more informed about inflation during spikes but misjudge how asset returns respond to inflation. They expect higher raw gains — called nominal returns — and they overestimate the actual purchasing power of their returns, while inflation shaves real returns. Furthermore, many investors misjudge the effectiveness of inflation-hedging strategies. For financial consultants, this research indicates the need to educate clients with evidence-based narratives, coupled with practical diversification and anchor expectations in real, long-horizon outcomes.
Weber, who joined the Daniels School as a professor of finance in 2025, emphasizes that the link between inflation and stock returns is complex and not uniformly favorable to equities in the near term. During times when inflation is rising and peaking, investors’ misaligned perceptions — about purchasing power and the need to hedge — help explain why clients may hold overly optimistic stock-return expectations even as inflation accelerates. A key implication for advisors is that simply informing clients about current inflation levels is insufficient; it is critical to connect inflation dynamics to asset-class behaviors and real-return outcomes over meaningful horizons.
Educational approaches should focus on three pillars. First, present the distinction between nominal and real returns. Clients should see how inflation compresses real wealth even when nominal equity markets advance, which recalibrates expectations without dampening long-run growth potential.
Second, introduce hedging strategies with concrete illustrations. The paper highlights that international diversification and commodity exposure can mitigate domestic inflation shocks, offering a practical path to resilience beyond a single-country focus.
Third, couple data with narrative context. While stories can engage clients, they must be paired with transparent historical performance and clear implications for today’s portfolios. The combination of numbers and scenario storytelling helps align client beliefs with evidence rather than intuition alone.
Weber recommends financial advisors discuss diversification as a hedge against inflation. International diversification helps hedge domestic inflation because global exposure can capture different inflation dynamics. Additionally, exposure to commodities and gold can serve as inflation hedges, particularly during periods driven by supply shocks or inflation uncertainty. Breaking down domestic inflation into global and domestic components clarifies which parts of inflation can be mitigated through portfolio diversification versus those requiring asset class tilts (e.g., energy stocks to hedge energy-driven inflation).
The research suggests a few successful strategies for investors:
The paper indicates that advisors can educate investors using simple, data-backed narratives that compare long-run outcomes (e.g., the S&P 500 versus Treasury bills over decades) to demonstrate the impact of inflation on purchasing power and the virtue of staying invested.
Weber recommends emphasizing the dangers of overconcentration. Most people concentrate their investments in their home country, their employer or their industry. Global exposure decreases risk correlated with domestic labor income and local shocks.
As investors approach retirement, their investment plans will change, but with life spans extending for several decades after retirement, advisors can help them plan for staying invested. Don’t abruptly reduce equity exposure at retirement. Maintaining some equity exposure can help sustain purchasing power. But investors need coaching about higher expected returns; these come with accepting risk. Advisors can also encourage persistent saving and a disciplined, diversified investment approach.
Additionally, Weber cautions against overreliance on single signals. Markets can remain irrational longer than expected. Avoid overreacting to each inflation news scare or cyclical pivot. A diversified core portfolio, complemented by targeted hedges, tends to be more robust than attempting to pick winners in a volatile inflation environment.
Advisors can effectively help clients navigate inflation without surrendering long-run goals. By teaching clients to anchor expectations in real returns, to diversify thoughtfully across regions and asset classes, and to combine clear data with accessible narratives, financial consultants can build portfolios that withstand inflation’s headwinds while preserving the pathway to durable wealth.
