How exposed your pension and ISA are to AI – and what experts say you should do

Investment experts have been warning of a potential “AI bubble burst” for several years now, as tech company valuations have skyrocketed. In the past week, there has been something of a sell-off – a rapid drop in price – of tech firm stocks. The Nasdaq 100 – an American stock market index heavily weighted towards technology companies – fell by more than 5 per cent last week alone. We take a look at why the fall happened, and what it means for UK pension and ISA holders. Why have tech stocks fallen? There are multiple reasons for the recent dips in technology stocks. “Investors are worried about large amounts of money being spent on AI infrastructure and no clear idea of when, or whether, there will be payback,” said Dan Coatsworth, head of markets at AJ Bell. But these worries have been around for months if not years, so why has it triggered a dip now? Experts say the answer lies in the US mid-term election results last week, which resulted in better than expected results for the Democrats, potentially curtailing President Trump’s power. “Democrats now have more influence and could slow down the pace of data centre rollouts and look at new ways to regulate the sector. The AI story has all been about speed, and now there is a danger of it moving to a lower gear, and some of the wheels falling off,” Coatsworth added. Separately, Nvidia, which invests heavily in AI, saw shares tumble more than 7 per cent today (Monday 9 November) after it emerged that the chief executive Jensen Huang was the target of a foreign spy operation.The timing, given growing investor concern in the industry, has added more fuel to fears the AI bubble could pop. What does it mean for your ISAs and pensions? Many people are exposed financially to technology stocks through investments in pensions, ISAs and general investment accounts. ISAs and general investment accounts If you hold a stocks and shares ISA or general investment account, you may hold shares in tech stocks. You may be invested in individual firms – such as software companies or chip manufacturers – that have been heavily affected by the recent sell-off. Alternatively, you may hold investments in exchange traded funds that are exposed to AI. Exchange traded funds (ETFs) are a pooled investment fund that holds a collection of assets. Investing in one allows you to invest in hundreds of companies – or different assets like bonds or gold – at once. Some of these ETFs are designed to track big stock market indexes, with a classic example being the Vanguard S&P 500 ETF, which tracks the S&P 500 Index and gives you exposure to 500 of the biggest companies in the US. Firms with heavy involvement in AI make up a large portion of this index – Nvidia for example makes up over 7 per cent of the S&P 500 on its own – meaning daily moves from these firms can have a big impact on your money. Susannah Streeter, chief investment strategist at Wealth Club, says: “You don’t necessarily have to own individual shares in Nvidia, Microsoft or other big technology companies to have significant exposure to the AI trade. “Many popular global and US index-tracking funds are heavily weighted towards a relatively small number of mega-cap technology businesses. That means people could have a much bigger stake in the fortunes of the AI giants than they realise.” If you are exposed to these firms, it is likely you have seen the value of your investments fall recently. As an example, if you held an S&P 500 tracker, your investments probably fell by over 3 per cent last week. Pensions Some pension holders will be affected by the AI sell-off, whereas others won’t. Some people have a type of pension known as defined benefit (DB) which pay a guaranteed income for life when you retire, so the risk is on your employer. “Members of DB schemes are largely shielded from market swings, provided the employer backing their pension promise remains in business,” explains Dan Coatsworth. Holders of defined contribution (DC) pensions – which are now more common in the private sector – are likely to be affected. These are pots of cash that are esssentially invested. You may have picked the investments yourself, but they also may be in a default fund if you hold a workplace pension and have not selected an alternative. Around 45 per cent of the assets held in British pension schemes are invested in US shares, according to investment bank Panmure Liberum, and with AI firms making up a large portion of these shares, it’s likely UK pension holders will have seen a hit to the value of their retirement savings. If you are invested in AI firms, there may be a temptation to sell your stocks, but experts caution against this kind of action as a knee jerk reaction. “There is always uncertainty as to when a rebound will happen, but history suggests that staying in the market is normally a sensible course to take. Market rebounds can happen quickly and those sitting on the sidelines often miss the best days during the bounce back,” said Coatsworth. Camilla Esmund, head of investor campaigns at interactive investor, said those with ISA and general investments could use this situation as a chance to review whether they a diverse portfolio. “It is wise to diversify your portfolio across sectors, regions, and asset classes, so no single shock derails your progress. By doing this, you are spreading your risk and ensuring that you are not overexposed to one area of the market. Even though we can’t be sure what comes next, what we do know is that investors who keep their nerve tend to be rewarded over time.” Should you do this immediately? Streeter says it depends. “If investors have concluded that their portfolios are too heavily concentrated in a handful of US technology companies, it may make sense to rebalance rather than wait for a particular share price or index level to return. Otherwise, they risk remaining exposed to a level of volatility they are uncomfortable with. “That doesn’t mean making sweeping changes overnight. Investors could consider phasing changes over time, particularly if they are nervous about making a big switch during a turbulent period.” The equation is slightly different for pension holders. “Those approaching retirement may want to consider protecting themselves against further falls, as they have less time to ride out volatility and recoup losses. Younger investors with decades before retirement have much longer to weather market downturns and benefit from a recovery, provided they are sufficiently diversified,” says Streeter. Some pension firms will already move your money out of riskier investments into less volatile ones as you approach retirement anyway, in a move called lifestyling.