AI Bubble warning: How worried should you be about your investments and KiwiSaver?
Friday, 10 October 2025
The echoes of the dotcom bubble of 2000 are reverberating worldwide, with growing concern about the formation of a large and unwieldy AI bubble.
This week, the Bank of England warned of a “material” danger posed by the threat – and potential collapse – of over-inflated US tech stocks.
In some ways, England’s central bank is behind the curve in terms of triggering the warning siren.
Jerome Powell at the Federal Reserve, Amazon founder Jeff Bezos, Meta founder Mark Zuckerberg and OpenAI founder Sam Altman have already raised similar concerns, despite also being key beneficiaries of the hype cycle.
Harry Smith, a portfolio manager at Fisher Funds, tells Stuff there’s clear evidence of technology stocks being overvalued at the moment and that some of this is based on questionable assumptions.
Smith says the AI hype train has seen the market value of tech companies inflate by US$3 trillion, but the revenue or income to justify that has not come close to materialising.
“$3 trillion is about 10% of US GDP, so we are talking a massive number,” he says.
“We’ve already had one report from MIT say that 95% of AI projects have failed, and another from McKinsey saying that among companies using AI, 80% had seen no tangible impact.”
Lessons from history
This is not to say Smith questions the validity of the AI hype. On the contrary, he strongly believes it will make an enormous difference to the world, but it’s important to understand how the hype train works before getting onto it.
Smith says the Gartner Hype Cycle graph feels incredibly relevant right now. This suggests there are five stages that we flow through when there’s a technological breakthrough.
It starts with the “technology trigger,” which is built on initial interest and early proof-of-concept stories. This builds into the second stage, typified by the “peak of inflated expectations”.
From this, there’s a big slip in enthusiasm as we drop into the “trough of disillusionment,” which happens when your initial expectations aren’t met quickly enough.
Looking at the comments from the Bank of England and others in the know, it increasingly looks as though we could be headed for the trough of disappointment in the AI hype cycle. There’s every chance that things could settle down again, but this will take time.
Enthusiasm will again build as understanding improves and we will get to the point where real productivity gains are made, but this won’t happen overnight.
The story of the internet is a case in point. Smith reminds me that some of the biggest winners in the internet hype cycle came of age after the trough of disappointment of 2000’s dotcom bubble, pointing to golden child Google only listing in 2004, the same year that Facebook was founded.
Sharesies co-CEO Leighton Roberts agrees there will ultimately be winners and losers as the AI market matures.
“Like investors all around the globe, many Kiwi investors are exposed to companies that have seen material growth over the last 12 - 24 months due to AI-related developments and future opportunities,” Roberts told Stuff.
“This is true for those who invest directly into these companies, have KiwiSaver or other managed funds.”
So how vulnerable is your KiwiSaver?
Much of the AI hype has been concentrated in the US stock market. Among the 500 biggest companies listed on the US stock exchange, only ten now account for as much as 40% of the overall value of all those companies.
Put another way, for every dollar you invest in an index tracking the fortunes of those 500 companies (for example the S&P500), 40 cents will go toward only ten companies.
Eric Walkington, a sales trader at CMC Markets, says KiwiSaver funds most exposed to global shares will likely take the biggest hit in the event of an AI bubble.
Walkington says balanced, growth or aggressive funds tend to be the ones with the highest portion of investment in the international stock market and that these will be most sensitive to the ups and downs of those companies. Conservative funds are less likely to suffer.
The 2025 KiwiSaver annual report from the Financial Markets Authority showed a significant uptick in number of New Zealanders invested in growth funds.
Growth funds now account for nearly half of all KiwiSaver funds under management, up from only 28.3% in 2015. In contrast, the proportion of conservative funds has falling off a cliff, dropping from 40.4% in 2015 to 16.2% in 2025.
The result? At least one in two KiwiSavers will notice an impact on their retirement savings in the event of the AI Bubble bursting.
Caught between panic and FOMO
It would be understandable to feel a twinge of nerves amid the growing chorus of headlines and institutions all crowing about the risk of an AI bubble.
That emotional response is natural, but it can also lead to less than ideal decision-making.
Mark Riggall, a portfolio manager and Milford Asset Management, says investors need to avoid panicking.
'An investor shouldn't do something because they're nervous or see a headline or read something somewhere,' says Riggall.
'You don't invest in shares broadly without expecting some degree of volatility. It just comes hand in hand,' says Riggall, explaining that it’s important to keep focus on the long-term goal of your investing strategy rather than short-term ups and downs.
'You're in a growth or balanced fund because you've got a five-year or more investment horizon and therefore you have an ability to ride through short-term periods of volatility,' he says.
'Staying the course, especially for KiwiSaver is critical.”
On the flip side of the panic, Riggall also warns against making investment punts on stocks because they’ve grown significantly in recent months.
What he’s referring to here is the impact of FOMO (fear of missing out). Sometimes investors might get caught in the hype and invest in something that everyone is talking about, only to then see the price stagnate or decline.
Both panic and FOMO are instincts best avoided when it comes to making smart investing decisions, says Riggall.
Playing the long game
Every investment specialist I spoke with reiterated the point that time in the market is a much better strategy than trying to time the market.
It’s a sentiment best captured by Warren Buffett, the CEO of Berkshire Hathaway, who famously said “our favourite holding period is forever” – the point being that it’s better to buy and hold than to dip in and dip out.
There tend to only be a few moments in every year when markets drop or rise significantly. Unless you are really are the Sage of Waiheke or the Clairvoyant of Invercargill, you are best served by the staying in the market and committing to your long-term objectives.
As CMC’s Walkington points out, if you invested in the S&P500 40 years ago, you would have cycled through more crashes than you can count but you would still be doing well today.
Whether it’s your KiwiSaver, a managed fund or your personal investing, the key is to ensure you have a long-term strategy anddon’t put all your money in one bucket.
And whatever you do, ignore the loud screech of panic or the enticing whisper of FOMO. Neither of these will lead to good decision-making.