Share prices have shown significant growth, leading some to warn that this expansion is driven by overvalued technology stocks. Concerns regarding a potential "AI bubble" have been expressed by figures including the governor of the Bank of England and the head of Alphabet. Even investors without direct tech share holdings may have exposure or be indirectly affected by a market collapse.
Bubbles Are Difficult to Predict
Daniel Casali, chief investment strategist at Evelyn Partners, noted that bubbles are only identifiable in retrospect. Some commentators suggest current valuations for technology stocks are inflated due to expectations regarding AI profitability. Conversely, UBS bankers offered positive AI predictions, citing potential for increased spending to support share gains in 2026. The actual valuation of these companies could take time to manifest, and AI technology continues to develop rapidly. Decisions based purely on an assumption of an imminent bubble burst are not advised.
Potential Broader Impact of a Collapse
Casali stated that an AI market sell-off could lead to broader market contagion, affecting other sectors. A global stock market decline could impact employment, the banking sector (as warned by the Bank of England), and the wider economy. Investments held in stocks and shares, including those in ISAs or pensions, could decrease in value. Dan Coatsworth of AJ Bell highlighted that global equity tracker funds often have significant exposure to US technology stocks, which may include AI companies, even if investors are unaware.
Realized Losses Occur Upon Selling
Realized losses from stock market declines in pensions or investments occur only when shares are sold. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, advised against making immediate changes to pension contributions or investments due to short-term market volatility, as this could crystallize losses. She noted that workplace pensions often use "lifestyling funds" that de-risk investments by moving funds into bonds as retirement nears. Steve Webb, a partner at LCP, recommended that younger investors generally stay invested for long-term growth. Tom Francis, head of personal finance at Octopus Money, suggested evaluating the timeframe for needing funds: short-term needs imply less risky investments, while long-term investments inherently involve value fluctuations.
Considerations for Gains
Webb suggested that individuals nearing retirement, particularly those considering annuities, might evaluate locking in current high valuations. However, he cautioned about the risk of missing out on further market gains if investments are withdrawn. Investors must weigh the potential financial impact of missing future rises against the risk of losses from a market decline.
Diversification as a Core Strategy
Matt Britzman, a senior equity analyst at Hargreaves Lansdown, emphasized diversification across sectors and asset classes as a key protective strategy. Francis advised establishing an emergency fund of three to six months' expenses, diversifying investments beyond single "hot" stocks, and maintaining a long-term investment horizon (ideally five years or more).
Britzman acknowledged that an AI bubble bursting could affect all assets due to the tech sector's global intertwining. To mitigate this, he suggested lower-risk investments, assets with "safe haven" qualities like gold, or sectors with stable cashflows such as insurance, utilities, food producers, household goods, and telecoms, which often pay dividends. Casali affirmed gold's reliability as an investment and recommended short-term government bonds (gilts). Funds like the Trojan Fund and the Royal London Short-Term Money Market Fund offer access to these assets. Coatsworth also mentioned global equity tracker funds excluding the US, such as Xtrackers MSCI World ex USA, for reducing exposure to US tech companies.