Five ways to bullet-proof your ISA against falling markets

With global stock markets falling, it’s a good time to review your ISA portfolio. Here are five tips to protect your ISA against a market downturn.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of one pound coins falling over

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Global stock markets have lost some of their lustre in recent months. Growth stocks were hit first, amid concerns over interest rate hikes to combat rising inflation. This was followed by a more widespread fall in stocks due to Russia’s invasion of Ukraine. As a result, ISA investors may be tempted to delay investments over fears of another stock market crash.

Hannah Horvath from Business Insider comments that “Watching your stock portfolio plummet can be scary, but don’t panic during bear markets.” So, let’s take a look at the simple steps you can take to protect your ISA against stock market downturns.


Five tips for bullet-proofing your ISA

1. Invest in different asset classes

I confess that I’m guilty of putting all of my ISA eggs in the equities’ basket. It’s delivered strong gains in bull markets, but it’s a high-risk approach in falling markets.

I’ve compared the highest-returning asset classes after four stock market crashes, based on annual returns data from Business Insider.

Stock market event

Date of crash

Top three asset classes by returns

Covid pandemic


Gold (22%), US bonds (5%), international bonds (3%)*

Global financial crisis


International bonds (6%), gold (5%), US bonds (5%)

Dot-com bubble


REITs (22%), US bonds (8%), international bonds (5%)

Black Monday


International development stocks (68%), gold (19%), emerging market stocks (9%)

*to October 2020

This illustrates how non-equity assets such as gold, bonds and cash, act as safe havens in market downturns and provide a natural hedge against equities.

Thankfully, there are a number of ways to invest in these assets for your ISA, so you don’t have to worry about storing gold bars under your bed:

  • According to Citywire, the Primary Health Properties Trust is the most widely-held property fund by multi-managers. It’s delivered a five-year return of 75%.
  • The LF Ruffer Gold fund is one of the top-performing gold-based funds, with Trustnet reporting a five-year return of 88%. Or, alternatively, the iShares S&P/TSX Global Gold Index ETF achieved a five-year return of 60%.
  • Both the Schroder Sterling Corporate Bond and Allianz Strategic Bond funds have delivered five-year returns of 30%.

2. Diversify your equity investments

Legendary investor Warren Buffett once said, “Diversification is a protection against ignorance.” On the basis that most of us fall into this investor category, diversification is a good tool to reduce risk in your ISA.

Diversification can also improve returns. Blackrock Investment Management compared the returns from the S&P 500 Index to a diversified portfolio. While the S&P Index achieved higher returns in rising markets, it also decreased by a greater margin in falling markets. As a result, the diversified portfolio returned 166%, which was higher than the 147% for the S&P Index.  

Compared to individual stocks, investing in funds, investment trusts and ETFs diversifies your ISA portfolio. But it’s also worthwhile spreading your portfolio across different regions and sectors. According to Blackrock, the commodities sector achieved the highest return of 39% in 2021. Whereas it was Chinese equities and US equities that gave the highest returns in 2020 and 2019, respectively.

3. Consider cautious investments to limit downside

Guy Monson, chief investment officer at Sarasin & Partners, comments that “when it comes to equity selection in 2022, fortune may well favour the cautious.”

Increasing the proportion of cautious funds may help to protect your ISA against falling markets. There are two main types:

  • Absolute return funds aim to make positive returns whatever the market conditions. Both Man GLG Alpha Select Alternative and BlackRock European Absolute Alpha have managed to achieve positive returns in each of the last five years.
  • Total return funds (or ‘mixed investment’ funds) aim to smooth returns by making some gains in rising markets but shelter capital in falling markets. In the most cautious 0%-35% shares category, Trustnet reports that the Royal London Sustainable Managed Growth Trust has achieved the highest five-year return of 25%, while limiting annual losses to 1%.

4. Keep investing in your ISA

Capital Group comments that “emotional investing can be hazardous”, when the “natural instinct is to flee the market when it starts to plummet”.

The group warns that “Investors who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow downturns.” They point out that, since 1929, every S&P 500 decline of more than 15% has been followed by a 55% return in the following year.

For the brave, falling prices can reduce the average in-cost of your ISA investments. And investing over a long period also protects against stock market volatility.


5. Pick a low-cost ISA provider

Whatever the market conditions, fees can make a serious dent in the value of your ISA.

For example, if I invest a lump sum of £100,000 and achieve an annual growth rate of 8% for 20 years, paying a 0.25% fee leaves me with an ISA pot of £443,000, compared to £381,000 for a fee of 1.0%.

It may seem a small difference, but the higher fee has eroded the value of my ISA by over £60,000. To help you compare the different fee structures, our experts have compiled a list of our top-rated ISA providers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »