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The growth of AI – the dangers of following the crowd

AI is skyrocketing and taking some US tech stocks with it, but is its growth limitless? We look at the last time we saw something similar and what we can learn from it.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Artificial intelligence (AI) has been dominating the investing newsreel for some time now and it doesn’t look like the headlines are going away anytime soon.

In 2021 the size of the AI market was just under $100bn. Some are now expecting the market to grow by 20 times to nearly $200tn by the end of the decade.

Since the AI revolution, we’ve seen some US tech stocks skyrocket, taking the wider US tech sector with it.

However, some people are now starting to question just how sustainable this growth is and how much longer it can go on for. Remember, past performance is not a guide to the future.

If you’re new to investing, the word ‘bubble’ might not be familiar. Throughout history, we’ve seen a bunch of them. And while we’re not saying we’re in a bubble, we don’t think lessons from the past should be quickly forgotten.

So, what’s a bubble?

Picture a party balloon. If you don’t stop blowing air into it at some point, it pops.

When the price of a stock, or lots of stocks, becomes a lot higher than it’s actually worth, it creates a bubble.

When this happens, investors can sometimes be overcome by optimism about a rising stock market or the perceived fortunes of a company. They can throw logic out the window and be driven by the fear of missing out.

Just like the party balloon that can’t hold any more air, the market can’t handle any more increases and it bursts. The collapse can happen so quickly that investors often don’t have time to get their money out before suffering big losses.

This article isn’t personal advice. All investments can fall and rise in value, so you could get back less than you invest. If you’re unsure what’s right for you, ask for financial advice.

Have we seen this before?

A good example is the dot-com bubble of the late 1990s. After the invention of the internet, investors began pouring money into tech-based companies which were pegged to be the ‘next big thing’.

Between 1995 and 2000, the stock prices of these internet-based companies grew by over 400%. To give you an idea of just how crazy it got, companies which simply had ‘.com’ at the end of their name saw an average gain of 74% in just ten days.

Investors thought these rising share prices were the new norm and would continue into the future. Off the promise of plentiful profits, more and more investors piled in. But, actual earnings were often lacking and lots of the companies had flawed business models.

In the end, this couldn’t go on any longer and the bubble burst in the early 2000s. It caused market mayhem and sheer panic, leaving lots of investors with enormous losses.

Fast forward to the 21st century and there’s the added influence of social media and 24-hour news. Take the example of the viral meme stocks of 2021.

As these shares rocketed, investors jumped on the band wagon. Many ended up paying over the odds as they joined the race for returns. But when these meme stocks came crashing back down to earth, investors suffered big losses and were left with shares that they never even valued in the first place.

Although safety in numbers can feel reassuring, everyone has different investment goals. What’s right for another investor, might not be right for you.

What can we learn from the dot-com bubble?

If history’s taught us anything, it’s don’t follow the crowd.

With the latest news and trends at our fingertips, it’s easy to see what everyone else is doing and can be tempting to follow suit. Investors can find comfort in following others, and might unintentionally let their own investment plan go out the window, forgetting the bigger picture.

It’s what we saw in the dot-com bubble and it’s tricky to resist. But being aware of it can help make us better investors.

It's normal for our emotions to take control when faced with inevitable twists and turns of the market. But, acting on these feelings and chasing returns during good times or taking money out during bad times can affect long-term returns.

It’s important to remind yourself why you’re investing. It’s not to ‘get rich’ quick – that often only leads to disaster. Instead, it’s about building your wealth over time and investing for the long term.

How to invest through the AI hype

When it comes to AI, there’s a lot to be excited about and we think tech can play an important part in a diversified portfolio.

However, it’s important not to pin an entire investment strategy on it. Use it to help potentially grow your wealth as part of a wider portfolio, but make sure you’re investing in other areas of the market to spread your risk.

How to build an investment portfolio

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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