Taking hits in melee wasn't a real option for me until much later into the game. On the other hand, I didn't care that much about spell points. So when I came into the close contact and lost a couple of health, my fragile party was already nearly dead and I had to left for a temple or a fountain.
But apparently your way works too, since you have quite a nice progress. I go to the Silver Helms early, too, first clean up the lower hall of swordsmen and monks, and only after that I open the door to the guard room right next to the exit, pulling the guards out one by one. The captain is a major problem, but I always manage to get rid of him somehow.
Also a nice idea to use wands to get rid of those master monks. That's actually something I could very well do the next time I play the game. (I bought some wands only when I was going down in the watery part of the Dragoon Caverns, with all those oozes.)
(And, by the way, AC doesn't reduce damage, it just reduces the chance to be hit.)