When markets turn volatile, there is a lot to be said for doing little. Reacting to worrying headlines can be an expensive mistake – markets can be quick to price in new information.
It’s a good argument for getting your portfolio in shape ahead of time – for fixing the roof while the sun shines.
My goal is to have an investment portfolio in place that allows me to watch a temporary fall in the market and not feel the need to do anything at all. Or even to add to my investments at a better price.
That involves having a decent cash buffer. It means ensuring good geographic diversification. But it also points to a spread of investments across a range of assets that will not respond in the same way to negative events.
Taking the long view
Investing is a long game. And volatility can be the investor’s friend. So, one quite reasonable response to the current turbulence in markets is to take advantage of temporary price falls to build positions at more attractive levels.
My 2026 fund recommendations are all solid long-term investments. All three have fallen back since the outbreak of conflict in the Middle East two weeks ago. But all three remain above the level at which I recommended them at the start of the year.
My 2026 picks:
I continue to hold all three of these funds and see the recent pull-back as another good opportunity to build a position in them.
Shoring up your defences
However, even if you understand the importance of playing a long game and riding out periods of market volatility, there is a case for building some ballast into your portfolio.
This is especially the case for investors with a shorter-term time horizon, like me. Older investors are naturally less relaxed about market volatility than their younger counterparts. We might well be prepared to accept a lower return in exchange for a smoother ride.
One of the concerns about the current Middle East conflict is that it might be bad news for both shares and bonds. A rising oil price, if it persisted for any length of time, could hit economic growth, which would be bad for share prices. It might also stoke higher inflation, which could lead to higher interest rates and bond yields. Bond yields move inversely to bond prices.
In 2022, when inflation spiked and central banks raised interest rates, shares and bonds fell at the same time. This was painful for investors with a traditional 60/40 portfolio split between these two assets.
So, how can investors bolster their defences against a possible repeat of that scenario? Here are three solutions:
- Building a higher cash weighting
- Reducing the interest-rate sensitivity of any bonds held in your portfolio
- Increasing the proportion of alternative investments, such as total return funds, infrastructure, diversified income and precious metals.
The Select 50 can help on all three of these fronts.
Cash
Legal & General Cash Trust
While not strictly speaking as safe as cash in the bank, a money market fund performs the same defensive role in a portfolio – and usually offers a slightly higher return. It does this by investing in very short-term, high-quality bond investments and deposits (typically for only a few months). The Legal & General Cash Trust has a strong money market capability and is well-priced. A similar alternative to consider is the Fidelity Cash Fund.
Short-term bonds
AXA Sterling Credit Short Duration Bond Fund
Short duration means that the manager of this fund lends money to companies for a short loan period (perhaps only a few years). The fund also lends to lower-risk companies and takes no currency risk, as all loans are in sterling. The short duration of the loans means the fund is less affected by changes to interest rates, which could be useful if higher inflation triggers a reversal of recent rate cuts. The combination of lending to ‘safe’ companies over shorter periods makes this a lower-risk fund and investors can expect to receive modest but reliable interest payments.
Royal London Short Duration Global Index Linked Fund
For investors who are worried about inflation, this fund offers two benefits. It makes loans to governments around the world over short periods (under five years usually). This reduces the interest rate risk of the fund. Secondly, the interest paid on the bonds the fund invests in is linked to inflation. An index-linked fund should not be expected to provide full protection against inflation – as a bond fund it will be negatively impacted by rising interest rates and bond yields – but it can still provide partial protection in a more inflationary environment.
Vanguard Global Short-Term Bond Index Fund
This is a low-cost corporate bond fund that, like the Axa fund, lends money to companies over short periods. This makes it less vulnerable to changes in interest rates. The fund is also hedged to sterling, reducing currency risk. Vanguard has shown good skill in tracking its index and the cost is reasonable.
Alternative investments
First Sentier Global Listed Infrastructure Fund
Infrastructure can provide a diversified income stream for investors who are mainly exposed to equities and bonds in their portfolio. This fund invests globally in companies that own infrastructure assets like electric, gas and water utilities, toll roads, railways and airports. These investments can usually rely on customers who are dependent on them for their daily lives. This creates a steady income stream and one that is usually linked to inflation. This makes the fund a useful addition to a portfolio for investors looking for income with some inflation protection.
International Public Partnerships
This fund will be familiar to followers of my fund picks. It was a recommendation last year. Like the First Sentier fund, INPP invests in infrastructure assets (although directly rather than through the shares of companies that own those assets). It also enjoys a steady income stream that is usually linked to inflation.
It has a UK focus, with only around 25% of the fund invested overseas. As an investment trust, this fund has a couple of additional features. Its shares can trade at a discount or premium to the underlying value of the trust’s assets (currently the shares can be bought at an 11% discount, which could be an advantage if that discount were to narrow over time). It can also hold back income to pay out as dividends in future years. This helps provide investors with a steadily growing income stream. INPP has paid a rising dividend every year since 2006 and currently yields 6% (although this is not guaranteed).
iShares Physical Gold
This fund aims to provide investors with a low-cost exposure to physical gold and aims to track the gold price. Because gold often does well during times of geo-political or economic distress and high inflation, it can act as an insurance policy in a diversified portfolio.
Ninety One Global Gold Fund
An alternative approach to gaining an exposure to gold is to invest in the shares of gold-mining companies listed around the world. Although the fortunes of gold miners are linked to the gold price, they do not always track it. When the gold price rises, the shares of gold miners can sometimes magnify its gains if their costs remain in check. This has been the case recently (but the reverse could happen too if costs were to rise in an inflationary environment).
Ninety One Diversified Income Fund
Because this fund owns a portfolio of predominantly equities and bonds, it should not be seen as providing full protection against adverse market movements in these two asset classes. However, over time, the manager has shown skill in limiting losses and providing a steady and growing income. This has been reflected in a smoother journey for investors over the past decade, delivering growth and income through challenging market conditions.
Pyrford Global Total Return Fund
This fund invests in a range of assets, combining shares, bonds and cash with the aim of delivering a stable stream of total returns over the long term with low volatility and significant downside protection. It focuses on capital preservation and avoids assets and securities that offer poor fundamental value. It is conservative and contrarian, so you can expect it to increase its allocation to shares (usually below 50%) when markets fall and become cheap.
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