For much of the past year, market watchers have been sounding the alarm over a possible stock market crash, warning that the artificial intelligence boom could turn into the next major bubble to burst.
Until now, investors have largely shrugged off those concerns. Share prices have continued to climb, with the FTSE 100 gaining 9 per cent so far this year and America’s S&P 500 Index advancing by 12 per cent.
Yet history suggests the sceptics may eventually have their moment. The analysts, economists and fund managers predicting a sizeable market correction are unlikely to be wrong forever.
If a sell-off does arrive, it is widely expected to begin with steep falls among the US technology giants that have powered much of the recent rally. Nvidia, for instance, has seen its share price surge by an extraordinary 940 per cent over the past five years. But a serious downturn would not stop at Silicon Valley. Few sectors, stocks or global markets would be likely to escape the fallout.
Investors who lived through the dotcom collapse in early 2000 will need little reminding that market bubbles do not expand indefinitely. Sooner or later, exuberance gives way to reality.
The real challenge is not accepting that bubbles can burst, but judging when it might happen — and deciding how to respond. Market timing is notoriously difficult, and very few investors consistently get it right.
That leaves investors facing uncomfortable choices: stay the course and remain invested, switch out of shares and hold cash, or take the more measured route of reviewing whether their portfolios are properly diversified enough to withstand a sharp correction without derailing long-term financial plans.
Each approach has advantages and drawbacks, and experts remain split. One former hedge fund manager recently told my City colleague Alex Brummer that government bonds are the only genuinely safe haven for investors at present. His view is clear: a stock market crash is close, and selling risk assets is the prudent move.
For the past year, financial experts have warned of a stock market crash triggered by the popping of the Artificial Intelligence (AI) bubble
Stock market bubbles always pop. The difficult part is predicting when (few investors get market timing right) and what to do, writes Jeff Prestridge
It’s a view you must consider seriously – and government bonds do look attractive as yields continue to rise, not only in the UK but across the world.
But if you’ve taken time to read today’s article on investment funds for the next decade (see page 50-51), you will realise I sit in a different camp.
Provided your investment horizons are long rather than short-term, and you’re 100 per cent comfortable watching your investments fall in value, you should stay invested. It’s a view I’ve held since I became a money journalist 40 years ago. Am I stuck in the mould? Maybe, but it has been a sound strategy.
Yet this doesn’t mean you should sit on your hands. Far from it. Now is the time to ensure your portfolio remains fit for purpose and has in-built resilience. Give it a makeover and, if necessary, make changes.
For a start, it’s essential your portfolio is diversified, not just across stock markets and investment funds, but with exposure to other financial assets such as precious metals (gold and silver) and government bonds.
The boom in the price of many US tech shares over recent years has resulted in many investors’ portfolios becoming skewed towards the US stock market. Now is a good time to correct this.
So, if you hold any of the ‘magnificent seven’ stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), consider trimming them, especially if you sit on big paper gains.
Within an Isa or self-invested personal pension, you can do this without worrying about nasty capital gains tax (CGT). If you hold them outside of these tax-wrappers, bear in mind you only have a £3,000 nil-rate CGT allowance for this tax year, after which tax of either 18 (for basic rate taxpayers) or 24 per cent (higher and additional rate) will be applied to any surplus gain.
Some of your investment funds may also have a large slice of assets in either the ‘magnificent seven’ or US tech stocks generally. Look at the latest monthly factsheets to find out how much and if you are uncomfortable with the level of exposure, take some gains.
Income-orientated investment funds are a good diversifier. Gold and silver should also be in your portfolio.
According to Ian Williams, who runs the Charteris Gold and Precious Metals (CG&PM) fund, gold and silver prices should move ahead, fuelled respectively by geopolitical uncertainty and electrification (silver is widely used in solar panels and electric cars).
The purest way to get exposure to rising precious metal prices is via a fund whose performance tracks either the gold or silver price: run by the likes of iShares and Invesco.
As for bonds, investing platforms have plenty of information on the best funds – and the most popular UK gilts.
I will review my Isa portfolio this weekend. I urge you to do the same.
