AI bubble: five things you need to know to shield your finances from a crash | Investments

TThe new year began with the end of 2025; Stock prices have exploded amid warnings from some that the growth was driven by overvalued technology stocks. Fears of an “AI bubble” have been voiced by many, from the governor of the Bank of England to the chairman of Google parent company Alphabet.

Even if you’re not actively invested in technology stocks, there’s a chance you have some connection to companies operating in this space. Even if you don’t, a crash could destroy other companies’ values.

So should you be worried about an AI bubble? So what can you do to protect yourself? Here are five things you need to know.

Bubbles are hard to predict

Daniel Casali, chief investment strategist at asset management firm Evelyn Partners, says you never know if there’s a bubble until after the fact, and if Guardian Money could predict the ups and downs of the stock market (shortly before we all put in the money and retired) you’d be the first to know.

Some commentators argue that investors are currently paying too much for tech stocks because of false expectations about how much companies will gain from advances in artificial intelligence.

However, others argue that this is not the case. For example, bankers at UBS had positive predictions about artificial intelligence in their next year reports. They acknowledged the risks in the industry and pointed out that much more could be spent on technology. This could support further gains for AI-related stocks in 2026, they said.

Even if these companies turn out to be overvalued, it may take time for that to happen. Currently, artificial intelligence technology is developing rapidly and after every setback, a new development may occur.

It is unwise to make decisions based solely on the assumption that the bubble is about to burst.

A collapse can affect you

“If the bubble is in AI, it won’t end with sales; all the other boats will start sinking too,” says Casali. “You’re starting to get infected. Sales in AI will impact everything.”

In the event of a crash, it seems clear that the value of companies that promise future profits from the use of AI will take a hit. For those unconnected with the industry, it’s about trust. “Confidence is everything,” says Casali. “If investors lose confidence, businesses and consumers will also lose confidence.”

A global stock market crash could have an impact on your business, the banking sector (in December the Bank of England warned of risks to financial stability) and the wider economy. The value of your investments in stocks and shares held directly or through your Isa or pension, which you may not be able to keep a close eye on, may decrease in value.

Technology stocks will likely fall the most, and you may have money in them without realizing it. Dan Coatsworth, head of markets at investment platform AJ Bell, says: “Some people may think that the key to not being too exposed to US-listed AI stocks is to use a global equity tracking fund. What they fail to realize is that the US is full of tech names, and geography makes up a large portion of the global market, such as 72% of the MSCI World index.”

No losses until cashed out

However, in the case of pensions or investments, you will only incur a real loss if you sell shares after the stock market has crashed.

You should think in terms of years rather than weeks or months in your planning and reactions to changes in the market.

“Retirement is the ultimate long-term investment and it is important not to let speculation or short-term volatility force you into making knee-jerk reactions you may regret,” says Helen Morrissey, head of retirement analysis at consultant Hargreaves Lansdown.

By making “snap decisions” to stop contributing or change investments, you run the risk of losses becoming apparent and “could make it harder to rebuild your pension when markets recover,” says Morrissey.

If you’re approaching retirement and saving for your workplace retirement, then there’s a good chance your money will be invested in something called a lifestyle fund.

“This aims to protect your retirement by shifting you away from stocks and into assets like bonds as you get closer to retirement, so you may find that you are less affected by market declines than you thought,” says Morrissey. “If you’re worried, 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 you still won’t suffer any real losses unless you withdraw money in the event of a crisis.

For younger people who own shares, “there’s something to be said for continuing to invest through the ups and downs of the markets; you’re likely to see your savings grow over the long term, and in any case it’s very difficult to ‘time the markets’,” says Steve Webb, a partner at pension consultants LCP.

If you’re worried about an investment bubble bursting, Tom Francis, head of personal finance at Octopus Money, says to ask yourself what’s making you nervous. “If the answer is that you will need this money in the next few years, that is a clear sign that you may be exposed to a very risky investment for such a short period of time,” he says.

“If you don’t need the money anytime soon but hate to see your investments drop in value, this is a natural part of investing,” he adds. “Over the long term, markets tend to perform well, and time is often your greatest ally.”

The same goes for earnings

As stock markets approach record highs, you may feel like it’s a good time to cash out your investments and secure gains.

“For those close to retirement, and especially anyone considering using their pension to buy an annuity, holding current high valuations steady is worth considering,” says Webb. But he has a caveat: “There is a risk that we will inevitably exit the market and see values ​​continue to rise.”

You need to weigh whether the financial impact of missing out on further rises is greater than the potential loss of a crash. Unfortunately, a financial advisor is unlikely to be able to tell you the best time to start making money, 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 remains the simplest and most effective way to protect against surprises.”

Francis says you should have an emergency fund to cover three to six months of expenses, then “diversify your investments and invest long-term, ideally five years or longer, rather than investing in one hot stock. Doing these three things can help you drown out the noise without panicking as markets shake out.”

According to Britzman, no investor will truly be immune from the stock market correction resulting from the bursting of the AI ​​bubble: “The technology sector is so intertwined with global markets that it is possible to argue that all assets could shake in this situation.”

With this in mind, he says the challenge is to “find ways to ensure your Isa or pension portfolio falls less relative to the wider market, and this means considering lower-risk investments, those with safe-haven qualities such as gold, or less attractive sectors that generate strong cash flows.”

Companies that may be popular with investors are in industries such as insurance, utilities, food manufacturers, household goods and telecommunications, Britzman says. “Many will pay dividends and their earnings are more predictable. Investors are generally happy to pay a premium for such companies during market downturns.”

Casali says gold has proven to be a very reliable investment and there is reason to believe that will be true in the event of a crash. He adds that short-term government bonds are another asset to consider; These bonds, also known as gilts, are a way for the government to borrow money and pay a fixed interest rate to investors.

“One to two year gilt yields are determined 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 this will make the returns on these gilts look good.

There are funds that give you access to these assets. One way to hold gold with household names such as Unilever, Visa and Nestlé is to invest in the Trojan Fund, which is accessible through many Isa platforms. The Royal London Short-Term Money Market Fund is an investment that offers access to short-term government bonds.

If you want a global tracking fund but want to reduce your exposure to US tech companies, Coatsworth says another option is a global equity tracker that excludes the US, such as Xtrackers MSCI World.