Iran war market jitters offer silver lining for investors

The Iran war has triggered big swings in the stock market since the conflict started more than two months ago.

While sharp selloffs in stocks can be unsettling, they offer a silver lining to investors, financial advisors and other experts said.

“Every drawdown is a useful stress test,” Kevin Khang, senior global economist at Vanguard Group, an asset manager, wrote in an April 22 market commentary.

Namely, the “discomfort” that investors feel reveals important information about their risk tolerances — something that “a calm market simply does not provide,” Khang wrote.

That information can help guide investors’ overall mix of stocks, bonds and other financial assets in a portfolio.

For example, if a significant dip prompts behavior such as portfolio reviews or “restless nights, that’s meaningful insight — not because this drawdown was particularly dangerous, but because the emotional signal it provides can help investors tailor portfolio allocations to their comfort zones,” Khang wrote.

The S&P 500 U.S. stock index shed about 9% from a Jan. 27 closing price peak to the March 30 trough, following the initial weeks of the Iran war. They’ve since gone on to recover their losses and reach new all-time highs, even though the Middle East conflict is ongoing.

Stocks retreated from record highs as of 2:30 pm ET on Thursday as investors waited for Iran’s response to a U.S. proposal to end the war and reopen the Strait of Hormuz, a key transit artery for oil tankers.

By the end of March, the CBOE volatility index (VIX) — known as Wall Street’s fear gauge — spiked to its highest levels since April 2025, when President Trump announced a slew of steep tariffs on trading partners during so-called “liberation day.”

Volatility is a natural feature of the stock market, according to financial advisors.

Investors who can weather the ups and downs have — historically speaking — reaped the financial benefits of higher long-term average returns relative to more conservative asset classes like bonds and cash.

The S&P 500 has experienced 32 different stock plunges of at least 9%, according to Khang. Compared to other episodes, the Iran war selloff “sits on the shallow end,” he wrote.

But the last 15 or so years have been “unusually friendly” for stock investors, according to Khang.

“The vast majority of investors that are under 50 years old — that’s a lot of people — have never really gone through gut-wrenching drawdowns that the older investors who are maybe in their 60s have gone through,” Khang said in an interview.

The recent drawdown may have felt especially jarring for younger investors, whose experiences with stocks have largely been positive and lulled them into a false sense of security, advisors said.

“Market volatility is a good test,” said Ryan Greiser, a certified financial planner and co-founder of Opulus, a financial advisory firm based in Doylestown, Pennsylvania.

He quoted former professional boxer Mike Tyson to reinforce the point, saying, “Everyone has a plan until they get hit in the mouth.”

There are two types of risk that investors should understand, according to financial advisors: risk capacity and risk tolerance. Having a good understanding of each can help guide an investor’s overall mix of stocks and bonds in a portfolio.

Risk capacity is an investor’s ability to take risk.

For example, a 25-year-old person investing for the long term generally has the ability — or capacity — to take ample risk, perhaps by investing 100% in stocks, since they have decades ahead of them to recover any losses.

An 80-year-old with a $4 million portfolio who only spends about $80,000 a year has way more than enough money to fund their lifestyle, said Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida. In theory, this person has the ability to take risks because they would be well-insulated in a market downturn.

However, such an investor may not have a high risk tolerance, which is their comfort level with short-term market gyrations. It’s a willingness to take risk, and is personal, subjective and guided by emotion.

Investors who get spooked by gyrations in the stock market may have a relatively low risk tolerance — and may therefore be invested too aggressively, experts said.

Such investors may be more inclined to engage in self-destructive behavior such as buying high and selling low, advisors said.

“What has [been] proven over and over again not to work is make an emotional decision and cash out when the market is down,” Greiser said. “If you can stick it out, the right decision is always to do that.”

The Iran war can help investors determine their feelings about financial loss, and dial in their appropriate stock-bond mix, said McClanahan, who is a member of CNBC’s Financial Advisor Council.

Of course, the answer for jittery investors likely isn’t to ditch stocks altogether.

Stocks are an important growth engine for portfolios, even in retirement, and help investors outpace inflation over the long term, advisors said.

For example, two popular target date funds, separately managed by Vanguard Group and Fidelity Investments, hold a roughly 48% and 55% allocation to stocks, respectively, for investors who planned to retire in 2025.

However, some of McClanahan’s retired clients have a roughly 80% allocation to bonds and a 20% allocation to stocks, she said. Ultimately, it’s all about making sure an investor’s cash flow needs and financial plan align with their lower risk tolerance, she said.

“If they’re happy with that, we’re happy with that,” she said.