AI stocks have dominated the global stock market in the last few years. The demand for AI products and platforms has triggered a massive demand for AI and memory chips. The development has consequently led to a massive surge in the stock prices of companies catering to the global need. Nvidia (NVDA) alone has dwarfed the size of several countries’ GDPs. While the growth has brought substantial wealth to many, it has also sparks concerns about a potential dot com bubble-like situation within the AI sector. Let’s discuss why there might be an AI stock bubble, and how you can protect your portfolio from a bubble burst.

Is There An AI Stock Bubble?

One of the most prominent voices arguing for an AI stock bubble is Michael Burry. Burry is most notable for correctly predicting the 2008 housing crisis. According to Burry, stocks are not responding to economic data such as jobs reports or consumer sentiment. Burry stated, “feeling like the last months of the 1999-2000 bubble.”

However, some do not believe we are in an AI stock bubble. BlackRock’s Carolyn Barnette says that the current situation is different from the dot com bubble because right now the companies show real profitability, disciplined capital allocation, and broad-based adoption. She also highlights that today’s AI capital investments come from earnings and cash. This is contrary to the debt-fueled rallies of the late 90s.

Also Read: 4 Reasons Why Micron Stock is Falling: What’s Behind the Dip?

Whether we are in an AI stock bubble or not, there is no harm in taking some precautions to protect your investments. Let’s discuss how.

How To Protect Yourself From A Crash?

According to Kevin Gordon, Schwab’s senior investment strategist, “one of the ways to hedge and diversify around [the risk] is actually thinking about the difference and the important distinction between the AI creators and the AI adopters.“

Gordon believes adopters are going to drive the next leg of investments in the AI sector. Investors could consider sectors that could benefit from AI rather than those that create it.

Diversification of your portfolio is another major way to protect yourself from a potential AI stock bubble. Safe havens such as gold could be a hedge against market crashes. Apart from gold, quality bonds could also hedge your investments in times of market corrections.