Worried about investment bubbles? Try following these Dos and Don’ts

From the Bank of England to the ‘armchair experts,’ everyone has a take on AI. The more share prices surge, the more wary investors ask, “How long will this last?” Here’s some guidance on how you can keep your finances resilient.

Investor nerves are inevitable – but is this a bubble?

Artificial Intelligence (AI) is dominating the markets – and the financial headlines. With that comes a natural nervousness that the bubble could burst. The Bank of England warned about it in October; even Sam Altman, the CEO of OpenAI, has voiced his concerns.

The collective market value of the US tech giants known as the Magnificent Seven (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla) has now surpassed EU GDP, leading some to draw parallels with the dot.com crash more than two decades ago. But is this a bubble? It’s difficult to say with any certainty.

In fact, trying to second-guess whether a market correction might be on the way isn’t necessarily the best way of approaching things. Instead of predicting when a bubble might burst, it’s better to make sure you insulate your investments for whatever direction the market takes. That’s our approach at AAB Wealth, so if you’re not already a client, here’s a list of some important things for you to consider:

DO spread your risk

Bubbles form when markets become too concentrated on one sector or theme. Market concentration is nothing new – in the 1980s, it was oil companies and industrials that dominated. Even so, it’s understandable that the longer the surge in share price goes on, the more investors become nervous.

To avoid damaging your portfolio, you need to follow one of the primary rules of good investing – diversification.

How does this look in practice? Our portfolios have exposure to more than 14,500 individual companies [1]. This spreads the risk for investors, mitigating any stock-specific risk that comes from individual share-price moves.

DO focus on areas with the highest expected returns

Big Tech gets all the attention, but there’s much more to AI than just the Magnificent Seven. It’s possible to benefit from the overall growth and contribution of AI and AI-related companies, while still having a diversified portfolio.

Our wealth models focus on smaller companies, value stocks, and more profitable businesses, because evidence suggests this is where investors are more likely to get higher expected returns over the long term. The result is a portfolio with lower exposure to the tech sector, where most of the  Magnificent 7  are classified (21% compared with the MSCI ACWI index). If the bubble does burst and these stocks fall in price, these portfolios should be more insulated from the effects.

DON’T get distracted by country weightings

Some investors might consider reducing their US holdings to shelter themselves from a potential bubble bursting. After all, not only is the US home to all Magnificent Seven firms, but the country also has other pressures, including the impact of trade tariffs and a slowing economy.

But beware. Choosing to ‘underweight’ one country by definition means you’re opting to be ‘overweight’ elsewhere. As the chart below shows, selecting stocks based on the country of origin is a very unreliable way to do better than the market. It’s incredibly difficult to accurately predict if one country’s stocks will perform better in any given year.

DON’T be fooled into thinking cash is always safer

At times of market uncertainty, it’s tempting for investors to put their money in ‘safe-haven’ assets they believe will be lower risk, with cash a popular choice. In recent years, this has been a common discussion point, especially with high interest rates and market volatility in recent years.

However, cash only offers the illusion of safety. Over the long term, it’s unlikely to beat inflation or materially grow over time. The table below shows a comparison of the annualised rate of return for cash and equities over 30 years. This period includes the dot.com crash, Covid, and the global financial crisis – but markets still delivered better returns over the long term.

Rate of return over 30 years
Cash savings account (UK one-month treasury bills)	3.0%
Diversified market portfolio (MSCI World Index)	9.0%
Diversified market portfolio with emphasis on premiums (Dimensional World Equity Index)	10.0%

Source: Dimensional, annualised rate of return between 1994 and 2024

Focus on what you know

“Comment is free but facts are sacred” said CP Scott, former owner and editor of the Manchester Guardian. In the same way, it’s very easy to give an opinion on what’s going to happen – much harder to be correct.

When predictions are made about the potential of an AI bubble, it’s important not to become an armchair expert – someone who confidently speaks their mind with scant evidence to back it up. Instead, focus on what you know.

A broadly diversified portfolio, focusing on areas of the market with the highest expected returns, should allow you to spread your risk, while also benefiting if the winds change and there is a change of market leadership.

Please contact one of our advisers if you’d like to know more.

[1] Source: Dimensional, as at end October 2025

[2] Source: Dimensional