TeaThe new year has begun as 2025 comes to an end – with share prices surging amid warnings from some that growth is being driven by overvalued technology stocks. People from the governor of the Bank of England to the head of Google’s parent company Alphabet have expressed fears of an “AI bubble.”
Even if you’re not actively invested in technology stocks, chances are you have some exposure to companies operating in this sector. Even if you don’t, a collapse could drive down the values of other companies.
So should you be worried about an AI bubble? And what can you do to protect yourself? Here are five things you need to know.
Bubbles are hard to predict
You never know if there’s a bubble until after the event, says Daniel Casali, chief investment strategist at wealth management company Evelyn Partners, and if Guardian Money can predict peaks and troughs in the stock market, you’ll be the first to know (long before we all cash out and retire).
Some commentators suggest that investors are currently paying too much for technology stocks because of false expectations about how much companies will earn from developments in AI.
However, others argue that this is not the case. For example, bankers at UBS made positive predictions for AI in their upcoming year report. While acknowledging the risks in the sector, he pointed to the potential for huge spending on technology. He said this could form the basis for further gains for AI-linked stocks in 2026.
Even if these companies become overvalued, this may take time to materialize. At the moment AI technology is developing rapidly, and every setback may be followed by another breakthrough.
It is unwise to make decisions based solely on the assumption that the bubble is about to burst.
Fall can affect you
“If there is a bubble in AI it doesn’t stop there with the selloff – all other boats will start sinking too,” says Casali. “You start getting contagion. The sell-off in AI will affect everything.”
If there is a collapse it seems clear that the value of companies that had promised to make future profits through the use of AI would be impacted. It is a matter of confidence for people associated with the industry. “Confidence is everything,” says Casali. “If investors lose confidence, so do businesses and consumers.”
A global stock market collapse could have knock-on effects for your job, the banking sector – in December the Bank of England warned of risks to financial stability – and the wider economy. Any investments you have in stocks and shares, held directly or through your ISA or pension, that you cannot keep a close eye on may fall in value.
Technology stocks are most likely to fall and you may end up with money in them without even knowing it. Dan Coatsworth, head of markets at investment platform AJ Bell, says: “Some people may think the key to not investing too much in US-listed AI stocks is to go with a global equity tracker fund. What they may not realize is that the US is full of tech names, and the geography accounts for a huge portion of the global market, like 72% of the MSCI World Index.”
No loss until you make cash
That said, when it comes to pensions or investments, the only real loss you make is when you sell shares after a stock market decline.
When making your plans, and reacting to market fluctuations, you should think in terms of years, not years or months.
“Pensions are the ultimate long-term investment, and it is important not to let speculation or short-term volatility force you to make knee-jerk reactions that you may regret,” says Helen Morrissey, head of retirement analysis at advisers Hargreaves Lansdowne.
Morrissey says making “immediate decisions” to stop contributions or make investment changes puts you at risk of huge losses and “could make it harder to grow your pension back when the market improves”.
If you’re approaching retirement and saving into a workplace pension, there’s a good chance your money is invested in something called a lifestyle fund.
“The aim is to protect your pension by moving you out of equities and into assets such as bonds as you approach retirement, so you may find you are less affected by market declines than you thought,” says Morrissey. “If you’re concerned you may choose to delay retirement for a while until things get better or talk to a financial advisor about the best approach.”
This won’t happen with your Isa but, again, in a recession you won’t suffer a real loss until you withdraw the money.
Steve Webb, partner at pensions consultancy LCP, says that for young people who own shares, “there is a lot to be said for staying invested through market ups and downs, on the basis that in the long run you are likely to see your savings grow, and it is very difficult to ‘time the market’ in any case”.
If you’re worried about the investment bubble bursting, Tom Francis, head of personal finance at Octopus Money, says to ask yourself what it is that’s making you feel uneasy. “If the answer is that you will need this money in the next few years, that is a clear indication that your investment may be too risky for such a short time frame,” he says.
He adds, “If you don’t need the money any time soon, but you hate to see the value of your investments decline, this is a natural part of investing.” “Over the long term, markets continue to perform well and timing is usually your greatest ally.”
The same is true for profits
With stock markets at record highs, you may feel like it’s a good time to cash in on investments and lock in any gains.
“For people nearing retirement, and especially anyone thinking about using their pension pot to buy an annuity, it is worth considering the current high valuations,” says Webb. However, he warned: “Essentially, there is a risk that you could pull out of the market and see prices continue to rise.”
You need to consider whether the financial hit of missing out on further growth is greater than the potential loss from an accident. Sadly, a financial adviser is unlikely to be able to tell you the best time to withdraw cash, but they should be able to help you put the risks and rewards into context.
diversification is best
“If there’s one principle in investing that never goes out of style, it’s diversification,” says Matt Britzman, senior equity analyst at Hargreaves Lansdown. “Spreading investments across different sectors and asset classes is the simplest and most effective way to avoid surprises.”
Francis says you should have an emergency fund for three to six months of expenses, then “diversify your investments instead of betting on a hot stock, and invest for the long term — ideally five years or more. Doing these three things can help you tune out the noise without panicking during market fluctuations.”
According to Britzman, no investor will actually be immune to the stock market correction caused by the bursting of the AI bubble: “The tech sector is so intertwined with markets globally that it’s possible to suggest that all assets could wobble in this situation.”
With this in mind he says the challenge is “to find ways to diversify your ISA or pension portfolio from the wider market, and that means considering lower-risk investments, investments in safe-haven properties such as gold, or less glamorous sectors that generate stronger cash flows.”
Britzman says companies that may prove popular with investors are found in sectors such as insurance, utilities, food producers, household goods and telecommunications. “Many will pay dividends, and their earnings are more predictable. Investors are often happy to pay a premium for these types of companies during market downturns.”
Casali says gold has proven to be a very reliable investment, and there are many reasons to believe the same will be true in a crash. He says short-term government bonds are another asset to consider – these bonds, also known as gilts, are the government’s way of borrowing money and paying a fixed interest rate to investors.
“One to two-year gilt yields are driven by the Bank of England base rate,” he says. “In the event of a crash, the Bank of England is likely to cut interest rates, and that will make returns on those gilts look good.”
There are funds that give you access to these assets. One way to own gold with household names like Unilever, Visa and Nestlé is to invest in the Trojan Fund, available through a number of Isa platforms. Royal London Short-Term Money Market Fund is an investment that provides access to short-term government bonds.
If you want a global tracker fund but want to reduce your exposure to U.S. tech companies, Coatsworth says another option is a global equity tracker that doesn’t include the U.S., like Xtrackers MSCI World ex USA.
