Gen X Investors: Protect Your Portfolio From an AI Bubble

Balloons that spell AI hover above a sharp pushpin.

The stock market is hitting record highs again.

Nvidia recently crossed $5 trillion. OpenAI is eyeing a $1 trillion IPO (although going public doesn't appear to be its biggest priority). In 2025, AI and semiconductor ETFs exploded — a classic late-stage sign of market fever.

But on the ground, the real economy isn't giving people that same lift in their everyday lives. Inflation may have slowed overall, but the cost of essentials — food, housing and especially health care — is still climbing, and consumers feel it every day.

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It's hard not to get swept up in the market's euphoria. Yet this split between Wall Street and real life forces the question: Are AI stocks soaring on true fundamentals, or are they flying too close to the sun?

If you're a Gen X investor — 45 to 60, sitting on your biggest 401(k) balance ever — you've probably made a lot of money in the last year from stocks tied to artificial intelligence, and it's tempting to think this ride will last forever.

Why I'm a little concerned

Let's start with the obvious: The stock market isn't as diversified as you think.

A handful of companies — mostly in tech — are driving nearly all the growth. When you invest in an S&P 500 fund, it feels like you're spreading your money across 500 companies, but nearly half your returns are now tied to fewer than 10 of them.

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That's because the S&P 500 is weighted by market capitalization. All the Magnificent 7 companies are tied to AI in some capacity, and all are benefiting to some degree from the narrative momentum, investor enthusiasm and capital flows into AI.

That means the bigger the company, the bigger its slice of the pie. In the third quarter alone, Apple (AAPL), Alphabet (GOOGL), Tesla (TSLA), Nvidia (NVDA) and Broadcom (AVGO) accounted for nearly 70% of the index's gain.

It's like ordering a sampler platter and finding out it's just different flavors of the same entrée.

Another red flag: Prices have sprinted far ahead of profits. When a stock becomes overvalued, investors are paying more for each dollar of earnings than history suggests is reasonable. And that could lead to lower future returns.

It's not that AI isn't real. It's that expectations have gone from exciting to almost magical. When big companies start trading hype for hype, it's a sign the story may be outrunning the substance.

And what goes up usually pauses for air, or comes down.

Why I'm not panicking

Yes, valuations are high, but it's not necessarily a sign we're heading for a repeat of 2000. The market is broader, the financial system is far sturdier now, and stress tests as safeguards didn't exist then.

Smart investors — and the fiduciary advisers I talk to every day — know the answer isn't to dump everything and run. It's to stay balanced.

But staying calm doesn't mean staying hands-off. You still need to know where your risks are and how your portfolio fits together.

The S&P 500 isn't your whole plan. You probably also own smaller companies, international funds and, hopefully, some good, boring bonds or short-term Treasuries. Those "boring" pieces are your seat belts when the ride gets rough.

And remember, record highs don't automatically mean bubbles. Markets hit new peaks far more often than they crash.

Since World War II, there have been roughly 48 market corrections — about once every year and a half — and only 12 bear markets. The odds of every rally turning into a meltdown are smaller than the headlines make them sound.

If you've been waiting on the sidelines for the "perfect" entry point, the truth is there isn't one. What matters most isn't timing the next drop — it's having a plan sturdy enough to weather it.

What Gen X investors should do right now

If you're in your 50s or early 60s, you've entered what advisers call the "retirement risk zone." That means a major market decline right before you start drawing down your savings could have an outsized impact on your long-term plan.

So, what can you do?

Start with a stress test. Ask your adviser, "What happens to my income plan if the market drops 25%?" Then run the numbers and look at the trade-offs. A good adviser can model how your plan holds up under pressure and whether you need to adjust your investments, spending or withdrawals.

You can also trim back your biggest winners. Lock in some of those AI-fueled profits and rebalance. You're not bailing, you're protecting gains.

Finally, make sure your investments match your timeline. Money you'll need in the next five years doesn't belong in high-flyer stocks. Sure, keep a healthy amount in equities to outpace inflation. But at this stage, your goal is preservation, not pursuit.

The real risk? It's regret

Markets move in cycles. Always have, always will. AI may transform the world, but that doesn't mean stock prices will march higher forever.

History tells us to expect turbulence. Corrections and bear markets are not anomalies. They're just part of the rhythm of investing. You don't need to predict when the next one hits. You just need to be prepared for when it does.

So yes, enjoy the rally. Celebrate your gains. But take a beat to check your risk.

Because when everyone's bragging about getting rich from AI, that's your cue to pause, rebalance and remember: The smartest investors aren't the ones chasing the next big thing, they're the ones who stay grounded when everyone else loses their heads.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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With more than 25 years in investor advocacy, Pam Krueger is the founder and CEO of Wealthramp, an SEC-registered adviser matching platform that connects consumers with rigorously vetted and qualified fee-only financial advisers. She is also the creator and co-host of the award-winning MoneyTrack investor-education TV series, seen nationally on PBS, and Friends Talk Money podcast.