The new year has picked up right where 2025 left off—with soaring share prices alongside warnings that the growth is fueled by overvalued tech stocks. Concerns about an “AI bubble” have been raised by figures ranging from the Bank of England’s governor to the head of Google’s parent company, Alphabet.
Even if you haven’t actively invested in tech shares, you likely still have some exposure to companies in that sector. And even if you don’t, a market collapse could drag down the value of other companies as well.
So, should you be worried about an AI bubble? And what can you do to protect yourself? Here are five key points to consider.
Bubbles are hard to predict
You can only identify a bubble after it has burst, says Daniel Casali, chief investment strategist at wealth manager Evelyn Partners. If we could predict the market’s peaks and troughs, you’d be the first to know—shortly before we all cashed out and retired.
Some analysts argue that investors are currently overpaying for tech stocks due to unrealistic expectations about AI profits. Others disagree. For example, UBS bankers acknowledged risks in the sector but pointed to the potential for significantly more spending on AI technology, which could support further gains for AI-related shares in 2026.
Even if these companies are overvalued, it may take time for that to become clear. AI technology is advancing rapidly, and setbacks could be followed by new breakthroughs. It’s unwise to make investment decisions based solely on the assumption that a bubble is about to pop.
A collapse could affect you
“If the bubble is in AI, the sell-off won’t stop there—it will start to sink all other boats too,” Casali explains. “You get contagion. A sell-off in AI will affect everything.”
A collapse would obviously hit companies that have promised future profits from AI. For businesses outside the industry, it’s about confidence. “Confidence is everything,” Casali notes. “If investors lose confidence, so do businesses and consumers.”
A global stock market crash could impact jobs, the banking sector—the Bank of England warned of financial stability risks in December—and the wider economy. Any investments you hold in stocks and shares, whether directly or through an ISA or pension, could lose value.
Tech stocks are likely to fall the most, and you might have exposure without realizing it. Dan Coatsworth of AJ Bell points out: “Some might think a global equity tracker fund limits exposure to U.S.-listed AI stocks. What they may not realize is that the U.S. is packed with tech companies, making up a large portion of the global market—like 72% of the MSCI World index.”
No losses until you cash in
That said, with pensions or investments, you only realize an actual loss after a market fall if you sell your shares. When planning and reacting to market swings, think in terms of years, not weeks or months.
“Pensions are the ultimate long-term investment,” says Helen Morrissey of Hargreaves Lansdown. “It’s important not to let speculation or short-term volatility lead to knee-jerk reactions you might later regret.”
Morrissey warns that making snap decisions to stop or change contributions could harm your long-term financial health.If you change or withdraw your investments, you risk turning paper losses into real ones, and it can be harder to rebuild your pension savings when markets eventually recover.
If you’re nearing retirement and have a workplace pension, your money is likely invested in a lifestyling fund. “These aim to protect your pension by gradually shifting your investments from equities into assets like bonds as you approach retirement,” says Morrissey. “This means you might be less affected by market downturns than you think. If you’re concerned, you could consider delaying retirement for a while or speaking to a financial adviser about the best approach.”
With an ISA, your losses aren’t locked in unless you withdraw the money during a downturn.
Steve Webb, a partner at pension consultants LCP, notes that for younger investors, “there’s a lot to be said for staying invested through market fluctuations. Over the long term, your savings are likely to grow, and trying to time the market is very difficult.”
If you’re worried about a potential investment bubble bursting, Tom Francis, head of personal finance at Octopus Money, suggests asking yourself what’s making you uneasy. “If you’ll need the money in the next few years, that’s a sign your investments might be too risky for such a short timeframe,” he says. “If you don’t need the money soon but dislike seeing your investments fall, that’s just part of investing. Over the long term, markets have tended to perform well, and time is usually your greatest ally.”
The same principle applies to gains. With stock markets near record highs, you might feel tempted to cash in and lock in profits. “For those close to retirement, especially anyone considering using their pension to buy an annuity, locking in current high valuations is worth thinking about,” says Webb. However, he cautions: “There’s always a risk that you sell and then see values continue to rise.” You need to weigh whether the cost of missing out on further gains is greater than the potential loss from a market crash. While a financial adviser may not pinpoint the perfect time to sell, they can help you understand the risks and rewards.
Diversification is key. “If there’s one principle that never goes out of style in investing, it’s diversification,” says Matt Britzman, a senior equity analyst at Hargreaves Lansdown. “Spreading investments across different sectors and asset classes remains the simplest and most effective way to guard against surprises.”
Francis recommends having an emergency fund covering three to six months of expenses, then “diversify your investments instead of betting on one hot stock, and invest for the long term—ideally five years or more. These steps can help you stay calm when markets fluctuate.”
According to Britzman, no investor will be completely immune if an AI bubble bursts and causes a market correction: “The tech sector is so interconnected globally that all assets could be affected.” The challenge, he says, is to structure your ISA or pension portfolio to fall less than the broader market. This might involve considering lower-risk investments, safe-haven assets like gold, or less glamorous sectors that generate strong cash flows.
Britzman points to sectors such as insurance, utilities, food producers, household goods, and telecoms as areas where companies might appeal to investors. “Many pay dividends, and their earnings are more predictable. Investors are often willing to pay a premium for these types of companies.”During a market downturn, gold is considered a safe haven asset. According to Casali, gold has historically been a reliable investment, and there are reasons to expect it to remain so in a crash. He also suggests short-term government bonds, or gilts, as another option. These bonds allow the government to borrow money and pay investors a fixed interest rate.
Casali explains that one- to two-year gilt yields are influenced by the Bank of England base rate. In a crash, the Bank of England would likely lower interest rates, making the returns on these gilts more attractive.
There are funds available to invest in these assets. For example, the Trojan Fund provides exposure to gold alongside well-known companies like Unilever, Visa, and Nestlé, and is accessible through many ISA platforms. For short-term government bonds, the Royal London Short-Term Money Market Fund is an option.
If you prefer a global tracker fund but want to limit exposure to U.S. tech companies, Coatsworth recommends a global equity tracker that excludes the U.S., such as the Xtrackers MSCI World ex USA.
Frequently Asked Questions
FAQs The AI Bubble Protecting Your Finances
1 What exactly is an AI bubble
An AI bubble refers to a situation where the market value of companies and assets related to artificial intelligence becomes inflated far beyond their actual proven worth driven by hype and speculation rather than solid financial performance If the hype fades and reality doesnt meet expectations a sharp decline or burst could follow
2 Why should I be worried about an AI bubble affecting my money
If a bubble bursts it can lead to significant losses in investment portfolios retirement accountss and the broader economy Even if you dont directly own AI stocks market downturns can impact mutual funds ETFs and overall financial stability
3 Im new to investing Whats the first thing I should do to protect myself
The most important first step is diversification Dont put all your money into a single sector like AI or tech Spread your investments across different types of assets and industries This way if one area crashes your entire portfolio isnt at risk
4 What are the five key steps to protect my finances
1 Diversify Your Portfolio Avoid overconcentration in AItech stocks
2 Focus on Fundamentals Invest in companies with strong profits and manageable debt not just a trendy AI story
3 Rebalance Regularly Periodically sell portions of your winning investments and buy more of the lagging ones to maintain your target asset allocation
4 Build an Emergency Fund Keep 36 months of living expenses in a safe accessible cash account This is your buffer against market volatility
5 Avoid Emotional Trading Stick to your longterm plan Dont panicsell during a dip or FOMObuy at the peak
5 How can I tell if a company is a solid investment versus just hype
Look beyond the buzzwords Check if the company has
Consistent revenue and profit growth
A sustainable business model
Reasonable debt levels
