The new year has started as 2025 ended – with share prices booming amid warnings from some that the growth is being driven by overvalued technology stocks. Fears of an “AI bubble” have been voiced by people from the governor of the Bank of England to the head of Google’s parent company, Alphabet.

Even if you have not actively invested in technology shares, the chances are you have some exposure to companies operating in the sphere. Even if you do not, a collapse could take down other companies’ values.

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

Bubbles are hard to predict

You never know if there has been a bubble until after the event, says Daniel Casali, the chief investment strategist at the wealth management company Evelyn Partners, and if Guardian Money could predict the peaks and troughs in the stock market you would be the first to know (shortly before we all cashed in and retired).

Some commentators suggest investors are currently paying too much for technology stocks because of misplaced expectations about how much the companies will make from developments in AI.

However, others argue that this is not the case. Bankers at UBS, for example, had positive predictions for AI in their year ahead report. Acknowledging risks in the sector, they pointed to the capacity for much more spending on the technology. This could underpin further gains for AI-linked shares in 2026, they said.

Even if these companies do turn out to be overvalued, it could take time for that to play out. At the moment AI technology is developing quickly, and for every setback there could be another breakthrough.

It is unwise to make decisions based purely on an assumption that a bubble is about to burst.

Fears of an AI bubble have been voiced by people from the governor of the Bank of England to the head of Google’s parent company, Alphabet. Photograph: Christian Ohde/Alamy

A collapse could affect you

“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,” Casali says. “You start to get contagion. A sell-off in AI will affect everything.”

If there is a collapse it seems obvious that the value of companies that had promised future profits would come from using AI would take a hit. For those unconnected to the industry it’s about confidence. “Confidence is everything,” Casali says. “If investors lose confidence then so do businesses and consumers.”

A global stock market crash could have an impact on your job, on the banking sector – in December the Bank of England warned of risks to financial stability – and on the wider economy. Any investments you have in stocks and shares, held directly or through your Isa or pension that you might not keep close tabs on, could fall in value.

Do you have any investments in stocks and shares held through an Isa? Photograph: Leonora Oates/Alamy

Technology stocks are likely to fall furthest and you may have money in them without knowing it. Dan Coatsworth, the head of markets at the investment platform AJ Bell, says: “Some people might think the key to not having too much exposure to US-listed AI stocks is to go with a global equity tracker fund. What they might not realise is that the US is full of tech names, and the geography accounts for a large chunk of the global market, such as 72% of the MSCI World index.”

No losses until you cash in

That said, when it comes to pensions or investments you only make a real loss after a stock market fall if you sell the shares.

In your planning, and reaction to market gyrations, you should think in terms of years, not weeks or months.

“Pensions are the ultimate long-term investment, and it is important not to let speculation or short-term volatility force you into making kneejerk reactions that you may come to regret,” says Helen Morrissey, the head of retirement analysis at the advisers Hargreaves Lansdown.

Morrissey says that by making “snap decisions” to stop contributing or change investments you risk crystallising losses and “it can make it harder to build your pension back up when markets recover”.

If you are getting close to retirement and saving in a workplace pension, then there is a good chance that your money is invested in something called a lifestyling fund.

“This aims to protect your pension by moving you out of equities into assets such as bonds the closer you get to retirement, so you may find you are less impacted by market falls than you thought,” Morrissey says. “If you are concerned then you may choose to delay retirement for a while until things get better or speak to a financial adviser about the best approach.”

With your Isa this will not happen but, again, in the event of a downturn you will not have real losses unless you withdraw the money.

Steve Webb, a partner at the pension consultants LCP, says that for younger people who own shares “there is a lot to be said for staying invested through the ups and downs of markets, on the basis that in the long run you are likely to see your savings grow, and it’s very hard to ‘time the markets’ in any case”.

If you are worried about an investment bubble bursting, Tom Francis, the head of personal finance at Octopus Money, says to ask yourself what it is that is making you feel uneasy. “If the answer is that you’ll need this money in the next few years, that’s a clear signal that you might be invested too riskily for such a short timeframe,” he says.

“If you don’t need the money any time soon but hate seeing your investments fall in value, that’s just a natural part of investing,” he adds. “Over the long term, markets have tended to perform well and time is usually your biggest ally.”

The same is true for gains

With stock markets near record highs, you may feel it is a good time to cash in investments and lock in any gains.

“For those close to retirement, and particularly anyone thinking of using their pension pot to buy an annuity, locking in current high valuations is worth considering,” Webb says. However, he has a word of caution: “Inevitably, there is a risk that you might come out of the market and see values continue to rise.”

You need to weigh up whether the financial hit of missing out on further rises is bigger than the potential loss from a crash. Sadly, a financial adviser is unlikely to be able to tell you the best time to cash in, but they should be able to help you put the risks and rewards in context.

Diversification is best

“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 says you should have an emergency fund of three to six months’ expenses then “diversify your investments rather than betting on one hot stock, and invest for the long term – ideally five years or more. Doing these three things can help you drown out the noise without panicking when markets wobble.”

According to Britzman, no investor will be truly immune to a stock market correction caused by an AI bubble bursting: “The tech sector is so intertwined in markets globally that it’s feasible to suggest all assets could wobble in this situation.”

With this in mind he says the challenge “is to find ways to make your Isa or pension portfolio fall by less than the broader market, and that means considering lower-risk investments, ones with safe haven qualities like gold, or less glamorous sectors that generate strong cashflows.”

Britzman says companies that might prove popular with investors are found in sectors such as insurance, utilities, food producers, household goods and telecoms. “Many will pay dividends, and their earnings are more predictable. Investors are often happy to pay a premium for these types of companies in a market downturn.”

Gold is deemed a safe haven asset. Photograph: Hiba Kola/Reuters

Casali says gold has proved a very reliable investment, and there are reasons to believe this will be true in a crash. He adds that short-term government bonds are another asset to consider – these bonds, also known as gilts, are the government’s way of borrowing money and pay a fixed rate of interest to investors.

“One- to two-year gilt yields are driven 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 that will make the returns on those 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 available via lots of 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 tracker fund but want to reduce your exposure to the US tech companies, Coatsworth says another option is a global equity tracker that excludes the US, such as Xtrackers MSCI World ex USA.