AI Bubble crash: How to shield your wealth from years-long recovery if market plunges

Wednesday, 5 November 2025

The prophets of AI apocalypse are starting to sing louder, signalling that a severe US market correction could be imminent.

And it could take years for investors to recover their losses.

The point here is not to spark fear. It’s meant to serve as a reminder that the adage about time in the market versus timing the market can sometimes equate to more time than you might anticipate – so should also factor into your investment decisions.

Every investor should be asking themselves: How long could I wait for the market to bounce back? And when do I actually need the money I’ve invested?

These questions are integral in determining how well you can weather the storm in the event of a sharp market dip, how much risk you’re willing to take and whether it may be time to diversify.

The murmurs about an AI bubble have been spreading in recent months, but a few high-profile voices have now been added to the mix.

Investor Michael Burry, famously played by Christian Bale in blockbuster film The Big Short, has wagered US$1.1 billion (NZ$1.95 billion) on falls in shares of Nvidia and Palantir, two major beneficiaries of the AI hype cycle.

The warning cry has been matched by the bosses at Goldman Sachs and Morgan Stanley, who anticipate a correction of up to 15% in the near future.

AI stocks and bitcoin have already taken a hit, an early warning that New Zealanders invested in the global market could be in for a rough ride.

Kiwis are exposed to the US stock market through their KiwiSaver accounts (growth funds tend to have more exposure) and through retail investment platforms, like Sharesies.

In recent years, many New Zealanders have also taken to investing in funds that allow investors to spread the money across a large group of companies rather than simply investing in one.

Data from Sharesies shows the S&P 500, which charts the performance of the top 500 companies listed on the United States stock exchange, is the most popular among those available on the platform (different variations of this index feature three times in the top ten).

This comes as little surprise.

Look at a historical graph of the S&P 500 over the last century and you’ll see an upward trajectory that paints a picture of gains and increased value.

On the surface, it looks like a safe, diversified bet for investors looking for a solid return on their money, but there’s more to this than meets the eye.

Concentrated power

Mike Taylor, the chief investment officer at Pie Funds, says investors in the S&P 500 are less diversified than they think.

“The top ten companies make up around 40% of the index,” Taylor tells me.

“It makes the index quite vulnerable. If one or two of those dominant companies stumble, the whole index could be hit hard.”

NVIDIA, Microsoft, and Apple, Amazon, Alphabet (Google), Meta, Tesla and Broadcom are all included in the top ten, making the S&P 500 very sensitive to the potential of an AI bubble bursting.

However, Dean Anderson, the chief executive at Kernel Wealth, offers a counter-argument to the concerns surrounding the S&P 500.

“If you invest $100 today, roughly $8.50 might go into Nvidia,” Anderson says.

“That sounds lopsided, until you realise your $8.50 buys the same fraction of Nvidia’s as the few cents you put into the 500th company buys of its market cap. In other words, each dollar you invest purchases an equal slice of every company relative to its size, which is why the index looks concentrated when a few firms are very large.”

Anderson adds that some investors are already looking to spread their risk beyond the United States by investing in funds like the Kernel World ex-US index fund, which has grown to over $160m in just three months. It’s as strong an indicator as any that investors are looking for diversification beyond US companies.

That said, Anderson says the concentration among the top companies in United States has always ebbed and flowed as the market has evolved.

“The names in the top five will almost certainly look different 20 years from now, just as they do compared to 20 years ago.”

Overall, this may be true, but history has shown a number of significant market corrections dragging the entire index down – and recovery from those falls hasn’t always been swift.

How long could a crash last?

The truth about the long-term performance of the S&P 500 is more nuanced than a simple line graph might show.

The crunchy detail lies not only in the dips and troughs along the way, but in how long those dips lasted.

Three historical crashes of the S&P 500 provide useful context here.

Near the end of March 2000, the S&P 500 rose to all-time highs on the buzz of the dotcom era. But then came the decline, which stripped 44.7% of value from the index by 9 October 2002.

Put another way, if you had a $100,000 investment during the March high, that would only be worth $60,880 by October (the blow being cushioned slightly if you reinvested any dividends that came from investments).

Yes, I can hear the critics say, but the market eventually recovered.

This might be true, but it took approximately seven and a half years to return to the highs before the crash.

The recovery period took even longer when the Great Depression knocked the sense out of the stock market in the early 1930s.

The S&P 500 price index did not surpass its 1929 peak again until September 1954.

We also have the stagflation period of the 1970s, an era typified by high inflation and slow growth. The S&P 500's peak in January 1973 was followed by a period of deep decline, with inflation eroding any small gains that were made. It would take a total of eight years for the market to recover its real (inflation-adjusted) high.

Where to next?

Eric Walkington, a sales trader at CMC Markets, tells me that a single-day dip doesn’t necessarily signal a time for panic.

Markets are still up 20% over the last six months, so a small breather is to be expected from time to time.

Some of this, argues Walkington, could also be attributable to the ongoing US Government shutdown, tariff limbo and other geopolitical issues that leave investors feeling skittish.

Asked about the risks associated with the S&P 500, Walkington points to the long tail of the index beyond the big few.

“Outside of the [top 7] the returns and growth of the other 493 haven't been anywhere near as impressive, meaning there’s a lot of room for growth,” he says.

There’s no question that investing in a diversified portfolio of US stocks (as contained in the S&P500) has worked out well for those who hold their position for a long time.

But as Morningstar’s Philip van Doorn pointed out in mid-October, you should always consider your investment objectives and time frame.

“Put on your short-term thinking cap for a moment,” Van Doorn advises.

“How did you feel earlier this year when the S&P 500 dropped 19% from 6,144.15 on February 19 to 4,982.77 on April 8?… Think back to how you felt during the heat of the sharp decline for the S&P 500 through April 8. Did you wish you had a more diversified – or less risky – portfolio?”

The bounce back from that dip was relatively fast, but what if the next recovery takes years rather than months? Will this hurt your financial objectives?

And if, as some analysts believe, the AI hype is indeed analogous to the dotcom bubble, how will feel to see your $100,000 investment shrink to $60,000 before starting to recover over time?

The S&P 500’s line graph may return to its upward trajectory in due course, but it may be running on a timeline that differs from your objectives. The question of whether you can weather that storm will be determined by your appetite for risk and what you’re actually hoping to achieve.