Investors might have been surprised at how supposed lower-risk investments haven’t provided complete protection as the Iran conflict unfolded. But they aren’t meant to, and it’s an important reminder that diversification is vital when investing.
Research by AJ Bell found that only money market funds and shares in non-life insurance companies have truly preserved investors’ capital since the Middle East crisis unfolded, when looking at investments one might expect to offer some ballast in difficult times. But defensive-style sectors like food and tobacco haven’t lived up to their reputation.
While this might sound gloomy, the key takeaway is that so-called lower-risk investments in general have been useful during the latest market wobble. They have provided stability which is often an underappreciated factor. Investing should be viewed as a long-term pursuit and remains an attractive way to make money along the way, and the current environment has shown the importance of having a blend of assets to ride out the ups and downs.
It’s also important to remember that despite the recent slump, markets are up considerably from where they were this time last year. For example, the FTSE 100 is up 24% in the 15 months since January last year, while the S&P 500 is up by 13.8%, based on total return data from ShareScope.
Certain areas like capital preservation investment trusts have done a fair job, falling by less than the broader market, and global inflation-linked bonds have done some heavy lifting in a challenging time for portfolios.
Bonds are expected to act as a cushion when equity markets retreat, and to some extent they have ticked the right boxes so far in March. However, on a broad basis they have still lost some value, albeit only minor compared to stocks and shares. That’s what you should expect to happen, rather than bonds not falling at all.
Even though markets staged a minor recovery earlier this week when Donald Trump gave the impression the Iran conflict could soon be over, there is no guarantee this will be the case. Investors should learn from how financial assets moved over the past week and a half in the event tensions in the Middle East intensify, or if future crises arise.
Defensive-style sectors
Certain areas with defensive qualities such as tobacco, healthcare and food left investors with a sour taste and a dent in their portfolio. Even gold and gilts pulled back in value, and left portfolios with a few scrapes along the side.
The speed at which the Middle East crisis unfolded caused shockwaves across both energy and financial markets. Many investors balked at how fast oil and gas prices went up, causing indiscriminate selling from portfolios and dragging down asset prices left, right and centre.
Consumer staples – a broad term that includes food, drink and household products – are often seen as defensive parts of the market because their products are consumed no matter what’s going on in the world. One might have expected them to do well during the crisis.
However, shares in this part of the market were dragged down by fears of new inflationary pressures, including a 17.3% slump from health and hygiene products giant Reckitt, an 11.4% decline in deodorant-to-cleaning products provider Unilever, and a 7% drop in cigarettes-to-vaping group Imperial Brands since the start of last week.
Many consumer staples consumers theoretically have pricing power, namely the ability to push up prices without depressing demand. In a gradual inflationary environment, this might be possible, but the past week hasn’t been a normal one.
The sheer pace of oil price hikes presents a major risk that consumers could face a sharp increase in the cost of living. This could potentially lead to a drop in consumption or more selective purchases until consumers get a better grasp on whether higher prices are a short-term issue or a permanent change.
Gold
Gold is often considered to be a haven in troubled times, but what many people don’t realise is that its price can still drop in a falling market. Investors often sell what they can in the face of trouble, and gold is a liquid asset.
In three of the 10 worst quarterly global equity market declines of the past 25 years, gold fell in price before rebounding. At times, gold has been able to cushion portfolios when equities dip, but this is far from a certainty. Other assets, such as short duration bonds, have functioned as a more stable diversifier.
Money market funds
Money market funds are designed to provide a return slightly above cash. They contain a portfolio of higher-quality, low-risk investments such as bonds issued by governments or companies that mature within 12 months, some as short as two to three months. This makes them far less sensitive to changes in interest rate expectations than longer-dated bonds. They also invest in certificates of deposits – a type of savings account that pays a fixed rate on money over a set period.
Money market funds were popular with investors during 2025 but started to lose traction as more people showed an interest in UK and global funds, according to analysis of AJ Bell DIY investor behaviour in January. Investors who maintained exposure to this fund type might be thankful for their decision to have a cautious element in their portfolio.
Gilts
Last week saw a sell-off in gilts as the market reassessed expectations for interest rates considering higher energy prices. Prior to the Middle East crisis, markets had expected the Bank of England to cut rates by at least half a percentage point during the whole of 2026 – now there is talk of rates staying higher for longer. Probability data from LSEG implies traders believe rates could remain at 3.75% for the next 12 months at least.
The two-year gilt yield jumped from 3.53% to 3.76% last week and now trades around 4%. In bond market terms, that’s a big movement in a short space of time. The rise in gilt yields makes existing bonds with lower coupons less attractive. Investors sell gilts if they believe newer bonds will be issued at a higher yield.
Conversely, the large drop in gilt prices since the start of last week might attract investors who believe the Middle East conflict could be short-lived and that interest rate expectations could shift once again towards looser monetary policy.
In this situation, an investor might buy short-dated gilts in the hope of making a capital gain, as UK government bonds are exempt from capital gains tax on any profit made from selling or redeeming them at maturity. That’s particularly attractive to investors who might have used up their ISA allowance and want further ways to make money and minimise tax.
Top tips on coping with a falling market
No-one knows if the worst is over for the sell-off in financial assets following the US and Israel’s strikes on Iran. There are mixed messages coming from the White House, with Trump recently implying everything will soon be fine versus US defense secretary Pete Hegseth suggesting the assault was ‘only just the beginning’.
Investors worried about what might come next should consider the following tips to bolster their portfolio in case of another shock:
- Diversification is paramount – spread your money and risks across different sectors, geographies and asset classes rather than going all in on one area of the market. It won’t necessarily stop you from avoiding losses in a market downturn, but it might help to cushion the blow. Multi-asset funds are one way to achieve diversification in a jiffy, and many come in different shapes where you choose your risk appetite, such as being adventurous or cautious.
- Stick with an investment plan – investing little and often is a great way to build wealth. When markets are falling, your money buys more shares or fund units; and they buy less when markets are rising. Over time that should average out. The old saying goes that ‘time in the market is much better than trying to time the market’, so avoid panic selling at the first sign of trouble and be patient.
- Don’t over-trade – constant buying and selling incurs costs and eats into your returns. Markets have seen wild swings over the past week, and this volatility might have encouraged investors to bet that certain stocks or funds will move one way or another. The market has quickly changed direction repeatedly, leaving some people sorely disappointed. Sometimes less is more when it comes to investing, rather than picking stocks or funds and selling out a few hours or days later. Investing is about taking a long-term view.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
