For the past year, financial experts have warned of a stock market crash triggered by the popping of the artificial intelligence (AI) bubble.
So far, markets have defied them and continued their journey upwards – the FTSE 100 is up 9 per cent this year while the S&P 500 Index in the United States has moved ahead by 12 per cent.
But at some point, the commentators, fund managers and economists who believe a significant market correction is coming will be proved right.
It will be led by sharp falls in the share prices of the big-tech US companies (Nvidia’s share price is up a staggering 940 per cent over the past five years), but no stocks or markets will escape. They will all be dragged down.
As many of you who were caught out by the bursting of the dotcom bubble in early 2000 will remember all too well, stock market bubbles always pop.
The difficult part is predicting when (few investors get market timing right) and what to do.
For example, whether to bite your lip and stay invested; sell and move your money into cash; or spend time ensuring your portfolio is sufficiently diversified to mitigate the impact of any significant market correction on your long-term investment goals.
There are pluses and minuses with all three strategies and opinion is divided. For example, a former hedge fund manager told my City colleague Alex Brummer a few days ago that the only safe place right now for investors is government bonds. He believes a stock market crash is imminent. Sell is his implied advice.
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.