The new year has picked up where 2025 left off, with soaring share prices accompanied by growing warnings that the rally is fuelled by overvalued technology stocks. Concerns about a potential "AI bubble" are being voiced by figures ranging from the Governor of the Bank of England to the chief executive of Alphabet, Google's parent company.
Even if you haven't actively bought shares in firms like Nvidia or Microsoft, you likely have exposure to the technology sector. Many pension funds and popular investment trackers hold significant stakes in these companies. A major collapse in their value could therefore ripple through the wider market, affecting savings and retirement pots across the board.
Why an AI Bubble is So Hard to Predict
Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, notes that bubbles are only truly identifiable in hindsight. While some commentators argue investors are paying excessive prices based on unrealistic expectations of AI profits, others see solid foundations for further growth.
Bankers at UBS, for instance, struck an optimistic tone in their year-ahead report. They acknowledged sector risks but highlighted the potential for massive future spending on artificial intelligence, which could support share prices through 2026. The rapid pace of technological development means that for every setback, a new breakthrough could emerge.
The key takeaway is that making drastic financial decisions based purely on a fear that the bubble is about to burst is unwise. Market timing is notoriously difficult, even for professionals.
How a Tech Meltdown Could Affect You
The impact of a major AI stock correction would likely extend far beyond Silicon Valley. "If the bubble is in AI then it does not stop there with the sell-off – all other boats will start to sink as well," warns Casali. "You start to get contagion."
A crash would obviously hit companies promising AI-driven profits hardest. For firms outside the tech sphere, the damage would come from a loss of investor and consumer confidence. The Bank of England has already warned of risks to financial stability, and a global stock market slump could affect jobs, the banking sector, and the broader economy.
Your exposure might be greater than you think. Dan Coatsworth, head of markets at AJ Bell, points out that a global equity tracker fund, a common pension or ISA holding, is heavily weighted to US tech. The US accounts for around 72% of the MSCI World index, meaning many UK savers have significant, indirect exposure to the fortunes of AI giants.
Your Defence Strategy: Patience and Diversification
Financial advisers emphasise that a paper loss only becomes real when you sell. For long-term investments like pensions, thinking in terms of years, not weeks, is crucial.
"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 most effective shield against market surprises.
Tom Francis, head of personal finance at Octopus Money, advises ensuring you have an emergency fund of three to six months' expenses. After that, "diversify your investments rather than betting on one hot stock, and invest for the long term – ideally five years or more."
For those concerned about concentration risk in US tech, Coatsworth suggests considering a global equity tracker that excludes the US, such as the Xtrackers MSCI World ex USA fund.
Where to Look for Shelter in a Storm
If seeking safer havens, analysts point to assets and sectors less correlated with tech volatility. Britzman highlights companies in insurance, utilities, food production, household goods, and telecoms. These often pay reliable dividends and have predictable earnings, making them attractive during downturns.
Daniel Casali cites gold as a historically reliable asset and short-term government bonds (gilts) as another option. In a crash, central banks like the Bank of England would likely cut interest rates, making the fixed returns on existing gilts more valuable.
Investors can access these through specific funds. The Trojan Fund, available on many ISA platforms, offers exposure to gold alongside stable companies like Unilever and Nestlé. The Royal London Short-Term Money Market Fund provides access to short-term government bonds.
For those nearing retirement, Steve Webb, a partner at LCP, notes that many workplace pensions automatically move savings into less volatile assets like bonds as you approach your retirement date. If worried, speaking to a financial adviser about your specific strategy is always recommended.
The overarching message from experts is clear: avoid knee-jerk reactions, focus on a well-diversified portfolio suited to your timeline, and remember that time in the market has historically beaten timing the market.
