Is your pension susceptible to a ‘double bubble’? As specialists concern pressing warning, this is what you have to know – and what to do to guard your nest egg and earnings

There’s no doubt that 2025 will go down in history as the year that artificial intelligence (AI) became entrenched in our day-to-day lives.

But it could also signify something a little darker, becoming known as the year that big tech companies entered bubble territory, fuelled by the AI frenzy.

So far, warnings of an AI bubble have been sounded by heavyweight sources, including the Bank of England, the International Monetary Fund and Dr Michael Burry, an investor best known for predicting the 2008 sub-prime mortgage crisis.

And last week, the Bank for International Settlements – the central bank to the world’s central banks – went one step further, pointing to a potential double bubble, in both US stocks and gold.

This follows a momentous year for the precious metal, with a price rise of 60 per cent to a record high of $4,293 per ounce.

Investors have flocked to gold, hoping it will offer safety for their wealth during this time of heightened geopolitical tensions and uncertainty. Meanwhile, the S&P 500 index of the largest US companies is also hovering at a record high, close to 6,838 points.

This is the first time in 50 years that gold and the S&P 500 have exhibited what the Bank for International Settlements describes as ‘explosive behaviour’ in unison.

And what tends to follow this is a significant market fall.

This means gold, long considered a safe haven in times of trouble, could prove to be anything but. Likewise, investors who piled into US or global funds could be badly hit by a fall in the value of technology stocks as they are likely to make up a large part of their portfolios.

So how exposed would your pension and other investments be if the AI bubble burst?

IS THERE AN AI BUBBLE?

This year, shares in the ‘Magnificent Seven’ US tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – soared to fresh highs, buoyed by investor enthusiasm about AI’s potential to transform business and society. Shares in AI chip giant Nvidia are up 28 per cent since the start of the year.

Parallels have been drawn with the dotcom bubble 25 years ago, when stocks of online companies rocketed on euphoria about the widespread adoption of the internet. Unfortunately, many of these companies didn’t have the profits to justify their lofty valuations, so what followed was a painful crash.

‘Today’s market is gripped by the promise of AI as a “fourth industrial revolution”, fuelling a fear of missing out,’ explains veteran fund manager Charles Montanaro from Montanaro Asset Management.

‘Companies now pepper their earnings calls and press releases with AI buzzwords, hoping to ride the hype – just as in 1999, when adding the “.com” to a company’s name would send its stock soaring overnight.’

He notes that AI, like the internet will prove to be a transformative technology, but the potential profits may have been translated into unrealistic share price expectations.

What is most concerning is that many fund managers and investors appear to have bet the house on AI. In some cases, 50 per cent of a portfolio will be invested in AI-related stocks and it is not unusual to see 10 per cent of assets in Nvidia alone.

The risk of taking such a big bet is that it is not clear which companies will win big from AI. The US tech giants are investing hundreds of billions of dollars to develop the infrastructure to support it. Will this be a brilliant gamble on the next technological advance or will it go to waste? Nobody yet knows.

Tech giants are under major pressure to deliver a return on their huge investments. Any whiff of disappointment on this front could spark big share price falls. When you throw in trade wars, geopolitical tensions and high levels of government debt, there are widespread concerns that the US stock market could take a tumble next year.

PROTECT YOUR PORTFOLIO

If we are heading towards a market crash, how can investors protect their savings pots and pensions from the worst of it?

The first step is to understand what you hold in your portfolio and whether it is diversified enough to withstand a big market fall.

‘Look at how much of your portfolio is invested in the stock market as opposed to other assets like bonds, gold and cash. This includes cash in the bank because that is part of your overall wealth,’ explains Laith Khalaf at DIY platform AJ Bell.

Make sure you’re happy with your mix of shares versus other assets – shares tend to be higher risk but offer better returns over the long term. Then, work out what proportion of your shares investments are in tech companies. 

You need to be careful here, because they make up a huge proportion of funds that are not tech-related on the surface, such as US or global funds.

A staggering 73 per cent of the developed world’s investment in stock markets is in US stocks and close to 20 per cent is in the tech giants. If any of these companies falter, the impact on your savings pot could be profound.

But working out how much of these companies you hold should be straightforward.

Most DIY investment platforms offer tools which show the different mix of investments in your portfolio. Some even display the top-ten stocks you hold via funds and investment trusts. 

If your platform can’t do this, you can look at the factsheets of the funds or ETFs (exchange-traded funds) in your portfolio online. Check what companies feature in their top-ten investments, as well as any crossover.

If you have the bulk of your portfolio in US stocks, particularly tech companies, Marlborough’s chief investment officer Nathan Sweeney says this should serve as a wake-up call to invest elsewhere.

Many investors will have benefited from the incredible share price performance of the Magnificent Seven over the years, so these stocks will represent a growing proportion of their portfolios. Now could be the right time to bank some profits and look for opportunities elsewhere.

‘The US has some of the best companies in the world which are growing fast, but you also want to have exposure to other regions like Europe, the UK, Asia, emerging markets and Japan,’ says Sweeney.

If you simply want to move away from a global tracker’s investments in US tech giants, you could consider a global ‘equal-weighted’ fund. This weighs each company in the index equally rather than by size, so you hold more in medium-sized companies. One example is the Invesco MSCI World Equal Weight ETF.

Alternatively a global ‘value’ fund, which seeks out companies that look cheap, is likely to have a lower exposure to the Magnificent Seven.

Here, Quilter’s investment strategist Lindsay James highlights the Redwheel Global Intrinsic Value fund, which holds a range of companies from around the world – and doesn’t have a single big US tech company in its top-ten holdings.

SHIFT AWAY FROM SHARES

Although it may feel counter-­intuitive, Sweeney says you don’t want to have a portfolio where everything is doing well. ‘If everything has done well, then ultimately it just means that a lot of your portfolio is doing similar things. This is called correlation,’ he says.

Not everything moves in line with the stock market.

In theory, government bonds, gold and other ‘alternatives’ like infrastructure and property behave differently, which means they don’t always crash when shares do.

This is why it makes sense to hold a mix of shares, bonds and alternatives in your portfolio. When the stock market is rocked by investor panic, it can naturally spill over to the corporate bond market.

However, government bonds are underpinned by different dynamics, which is why investors tend to flock to them during a stock market crash. 

Here, Lockhart Capital Management’s chief investment officer Andrew Wilson suggests backing ‘short-dated’ government bond funds or ETFs. These lend money to governments over one to five years versus typical long-dated government bonds, where loans can be up to 30 years.

Short-dated government bonds have less sensitivity to interest rate rises and inflation, and provide more predictable returns.

The SPDR Bloomberg UK Gilts 1-5 Years ETF is one example and has seen a return of 10 per cent over three years.

FINDING THE RIGHT MIX

The right mix of shares, bonds and alternatives will depend on how comfortable you are holding riskier investments as well as your time horizon.

The longer you have before you plan to access your savings, the more risk you are likely to be able to take as you have longer to ride out any falls. Having 60 per cent in shares and the remainder in bonds, gold, property and infrastructure is a good starting point for someone who is approaching retirement, Khalaf suggests.

However, someone who is younger and so is able to tolerate the inevitable turbulence associated with the stock market could consider having more in shares.

There are plenty of property and infrastructure investment trusts which provide access to different parts of these markets. Those looking for more general exposure to infrastructure assets could consider 3i Infrastructure, which is up 29 per cent over three years and invests in firms such as offshore wind safety company ESVAGT and airport ground support equipment supplier TCR.

In the property space, AEW UK Reit invests in UK commercial property and is up 39 per cent over three years. Alternatively, the iShares UK Property ETF is up 4.84 per cent over three years but is a cheaper option as it tracks a benchmark rather than being run by a fund manager.

GOLD CAN STILL SHINE

After a stellar year, can gold still help to protect your portfolio against a potential crash?

Even though the precious metal has gone up a long way, Wilson believes it still deserves a place in portfolios and should ultimately provide some protection in the event of a stock market sell-off.

‘It is a long-term hold and hedge against other things, like central banks making mistakes and inflation. In addition, there are reasons to worry about how developed countries are going to deal with their debt loads, and gold is a good hedge against that,’ he says.

Khalaf agrees. He suggests allocating around 5 per cent of a portfolio to the precious metal.

‘It has come a very long way in a short space of time. But equally, the conditions do look fairly supportive of gold at the moment in terms of what could be described as a crisis of faith in the central banking system,’ he adds.

iShares Physical Gold ETC allows you to track the gold price without having to buy the physical metal. VanEck Gold Miners invests in companies finding new gold. The funds are up 138 and 44 per cent respectively over three years.

PORTFOLIO PROTECTORS

If you want to protect your savings from a big market fall, it could be worth allocating a small amount of your portfolio to an ‘all-weather’ multi-asset investment trust, which aim to make money when markets go down.

Ruffer Investment Company and Personal Assets Trust both have a reputation for doing this. Ruffer is down 1 per cent over three years and has top holdings including oil company BP and Chinese retail platform Alibaba. Personal Assets Trust is up 16 per cent over three years and invests in gold bullion as well as consumer giant Unilever and payment firm Visa.

• What are you doing to protect your finances from a potential crash? Email [email protected]