Laith Khalaf is the head of investment analysis at AJ Bell, a financial services company.

There’s a lot of buzz about a stock market bubble, and it’s not without reason.

The valuations of the US stock market are soaring, with major tech giants at the helm of the S&P 500 navigating an uncertain AI landscape. These companies are spending billions of shareholder dollars to avoid becoming obsolete, like DVD players, MiniDiscs, and fax machines of the past.

We all know the damage a burst bubble can do to investments. For instance, an investor who put £10,000 into the S&P 500 in March 2000 watched it shrink to just £6,000 over the following three years.

Meanwhile, someone investing in the tech-heavy NASDAQ 100 would have seen their £10,000 dwindle to less than £3,000 by the end of that same period.

Determining exactly how much the Dotcom bubble burst contributed to this grim scenario is challenging, especially since the aftermath was worsened by the 2001 World Trade Center attacks and the Enron scandal.

AI bubble: Valuations in the US stock market are sky high and the tech giants are venturing into an unpredictable AI future,

But one way or the other, the first few years of the millennium were undoubtedly a brutal wake-up call for investors.

What is perhaps easy to lose sight of after a bubble has burst is how long and strong the preceding boom was.

The table below shows returns from the S&P 500 in the late 1990s. These figures show that even if you believe we are in a bubble right now, the question of where we are in the expansionary stage really matters to portfolio returns.

Source: FE

As early as December 1996, the Fed Chairman Alan Greenspan was warning about irrational exuberance in US stocks.

Investors who had taken that as a signal to step away from the punch bowl would have missed out on some intoxicating returns over the next three years.

Worse still, after watching stocks continue to soar, they might have got sucked back into the market just at the point the bubble was about to burst.

FOMO might be a recent verbal configuration, but fear of missing out is an age-old sentiment.

When FOMO is widespread, it can drive the market further and further into the stratosphere, leaving those left behind insolvent, if they are leveraged; unemployed, if they manage money; or exasperated, if they are a private investor.

Dotcom bubble: An investor in the S&P 500 in March 2000 saw a £10,000 investment drop to just £6,000 over the next three years

The risk of under-investing

The Alphabet CEO, Sundar Pichai, said last year that the risk of under-investing in AI is dramatically greater than the risk of over-investing.

For a technology company which stands to be left behind if it doesn’t compete in the AI arms race, he has a valid point.

But his words provide food for thought for stock market investors as well.

Looking back to the Dotcom boom and bust, there were risks to both over-investing and under-investing, and they are more finely balanced than you might think.

That is by no means to underplay the risk of being exposed to frothy assets during a bubble, but the cost of not participating in the upside also needs to be considered.

The table below shows returns up to the end of 2005 based on a number of different purchase dates, from both the S&P 500 and the typical money market fund.

With hindsight, the numbers show that investing in the market in December 1994, 1995, 1996 and 1997 was still preferable to investing in a money market fund, if you held on until the end of 2005, despite the market crash that was coming.

Investing in the money market fund was the better course of action in December 1998 and 1999, in the later stages of the bubble.

Source: AJ Bell and FE, total return in GBP from S&P 500 and IA Standard Money Market fund sector average, periods 31st December to 31st December

There is of course no definitive way to say if we are in a bubble, though the consensus now seems to be that we are.

If that’s true, it still doesn’t tell us where we are in the bubble, and whether there may be a further substantial leg in equity market returns to come.

As Howard Marks of Oaktree Capital is wont to say- being too far ahead of your time is indistinguishable from being wrong.

So where does all this leave investors who are being bombarded with a torrent of bubble warnings and are concerned about their investments?

Five things to do if you’re spooked by stock market bubble talk

1. Use regular savings

Use regular savings to commit fresh funds to the market. Doing so leads to a smoother journey and mitigates the risk to your portfolio of a sharp market correction.

This is most effective for those who are early on in their savings plan and whose new monthly contributions are relatively large compared to the assets they have built up.

The longer a regular savings plan goes on, the less effective it becomes at mitigating market drawdowns.

Some investors may also not be investing money in the market, for instance if they are drawing down their pension, in which case there are other levers that can be pulled.

Laith Khalaf:  you don’t have to take binary directional bets, such as being all in on the tech sector, or all ou

2. Think about your asset allocation

You don’t have to invest 100 per cent in shares. You can diversify your portfolio by investing in other assets like bonds, money market funds and gold.

Bonds and money market funds are now offering much higher yields than they were in the days of ultra-low interest rates, so you don’t have to entirely give up on returns by adding these to your portfolio.

Gold is often seen as a safe haven, but it is volatile, and has been on its own tremendous bull run.

Nonetheless it dances to its own tune and may provide some further diversification from shares, though it should only form a small part of your overall portfolio, effectively acting as a bit of insurance against other assets doing badly.

3. Consider multi-asset funds

Multi-asset funds come in various risk profiles ranging from conservative to aggressive.

Investors can therefore pick one which matches up with their own risk preferences, and adjust their risk as their personal circumstances change.

These funds invest in shares, bonds, cash, and sometimes gold, property, infrastructure, and other alternative assets too.

They’re a one stop shop and useful for investors who want someone else to take care of portfolio management for them.

4. Take stock of your stock exposure

Within the equity side of your portfolio, make sure you know where your exposure is, and that you’re comfortable with it.

In the context of a possible AI bubble this means taking special care to assess your holdings in US technology stocks.

These might be found in high levels in unexpected places, such as an S&P tracker, where 38 per cent of the portfolio is currently held in the Mag Seven plus Broadcom.

This high concentration leaches across into global trackers funds which will tend to have over 70 per cent invested in the US stock market.

These stocks have likely done your portfolio a wonder of good in the last few years, but as a result may now make up a bigger part of your overall wealth and might be due a trim.

5. Be measured with portfolio changes

If you decide to make changes to your investments, be measured in your approach.

One of the liberating things about running a portfolio is you don’t have to take binary directional bets, such as being all in on the tech sector, or all out.

You can weight your portfolio to fit a more nuanced view of the world.

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