Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Last week, US Treasury secretary Janet Yellen made an offhand comment: “It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.”

So far, so uncontroversial. Given the ultra-low base from which they’re starting, and the promising signs of post-pandemic growth in the US, it’s clear that interest rates are far likelier to head up than down.

This statement of the obvious inspired widespread investor panic. It deepened a sell-off in tech stocks and pushed US Treasury bond yields (which are inversely related to prices) higher.

Something similar happened this week. Investors have gazed on anxiously as their portfolios fell to renewed bouts of stock market volatility. Our own FTSE 100 was down more than 2% on Tuesday.

It’s hard to pin-point one clear cause - instead, an accumulation of economic news appears, like Yellen’s comment, to have given investors the jitters.

In the UK, first quarter GDP figures showed that, while the economy contracted 1.5% over the first three months of this year, the economy remained relatively resilient through the period’s long lockdown. Growth in March points to more ahead, perhaps something approaching the Bank of England’s 7.25% estimate for the year.

In the US, consumer prices rose by 4.2% year-on-year, their highest rise since 2008. In China, the cost of the raw materials going into its factories increased by 6.8% year-on-year in April, the fastest pace of growth in three years. Both rises were greater than expected.

On the face of it, this is all good news. Positive growth, rising prices - aren’t these the markers of an economic rebound we were hoping for?

The underlying anxieties that pushed markets lower are the same as those which Janet Yellen’s comment unearthed. Investors are facing a two-way pull between growth on the one hand, and inflation on the other.

Inflation is a nasty sounding word, but in principle it’s no bad thing. Moderate inflation, around the 2% figure that most developed economies aim for, is a positive. It’s good for growth, job creation, and encourages spending rather than sitting on cash.

That’s a far cry from the ghoulish inflation you might associate with the 1970s. A number of structural drivers back then - rising oil prices, the Vietnam War, the Space Race - combined to push inflation well into double figures.

Nothing we’ve seen this week suggests a repeat. US price inflation tells us more about the depressed oil price a year ago than it does about an overheating economy today. China’s high producer prices are unlikely to transmit to consumer prices in the short term. Central bank rate rises still look some way down the line.

Nevertheless, the problem markets face is that you don’t know you’re dealing with 1970s-style structural inflation until it hits. Given a lack of crystal ball, they’re using any tool they can to gauge whether a repeat is on the horizon. An offhand comment about interest rates or higher-than-expected price increases are the best they’ve got.

That means markets can look detached from the real economy. Last year, as the economic news worsened, stocks rallied to visions of good times ahead. This year it’s the reverse. As the reopening surpasses expectations in many parts of the world (not all, it goes without saying), investors are desperate for bad news.

Not that this makes it any easier for investors. Market volatility is scary, regardless of the strength of its foundations. More jitters will come, and they may get more severe. Fortunately, there are ways for investors to prepare.

The first is by being diversified. That used to mean being well exposed to both bonds and equities, but at a time when inflation is public enemy number one, both could fall at the same time. This means diversifying elsewhere: inflation-linked bonds, property and commodities could all have a part to play. Inflation-proofing your portfolio, just in case, is no bad idea.

It also means being diversified on a company level. As we’ve seen this week, the sorts of stocks that you’d expect to do worse from inflation-induced anxieties are the big-name, growth giants - Big Tech and Pharma, for instance. Exposure to more value-orientated, cyclical sectors, such as financials and services, may soften the blow.

And just as it doesn’t pay to get carried away by negative headlines, don’t be lulled in by fads either. Cryptocurrencies may seem appealing, but you shouldn’t expect a smooth ride. One tweet from Elon Musk is enough to send reverberations across millions of dollars of investor portfolios.

If volatility does hit, ask yourself whether you’ll be forced to sell at a loss. Ideally, you want to set aside at least six months’ worth of expenses in cash, so you’re able to keep your money invested and ride out any market dips.

Finally, don’t take my word for it. I know I said no one has a crystal ball, but Fidelity investment director Tom Stevenson does like to pick his moments. He wrote last week about ways in which you can protect yourself during turbulent markets. You can also hear him chat through his tips with Ed Monk in this week’s MoneyTalk podcast, which you can find here or download wherever you usually get your podcasts.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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