RUTH SUNDERLAND: You can’t predict where stocks will go next… so be prepared

The big question for 2026: Is this the year the AI stock market bubble will burst?

Michael Burry – the US investor who predicted the 2008 sub-prime mortgage meltdown, played by Christian Bale in The Big Short – believes the market ‘is in a bad situation’ and could face several difficult years.

My colleague Alex Brummer has spent the holidays reading about the Wall Street crash of 1929 and sees parallels with today, in mood, if not detail.

Fund managers and financial advisers tell me private investors’ number one concern is the risk of serious losses if markets unravel. We had a small taste of that last year when markets fell sharply in the spring after Donald Trump’s tariffs.

It is not difficult to spot markets that look stretched or irrationally valued, but that does not mean they are about to collapse. Burry’s warnings carry weight because he was right about the financial crisis, when most others were complacent. But he has also made predictions that have yet come to pass.

So it isn’t enough to predict that a crash will happen. You also need to predict when. Get that wrong, and you risk missing months or even years of returns.

Readers of a certain age will remember the late Tony Dye, a well-known fund manager in the late-1990s.

In the run-up to the dotcom bust, he believed markets were overvalued and heading for a fall, earning himself the nickname Dr Doom. He pulled clients’ money out of dotcom shares and into cash and value stocks, which underperformed. Eventually, he was pushed out – just before the bubble burst. For most professionals, let alone private investors, trying to time an AI-led collapse is futile.

All is not lost, however, because it is possible to prepare, which is a far more realistic option than gazing into a crystal ball.

The best preparation is to diversify: Across asset classes, sectors, geographies, investment objectives and fund managers.

I am combing through my own portfolio to identify ‘false diversification’, where investments appear spread

out but are in reality driven by the same forces. US tech exposure can be hidden in plain sight. The venerable F&C investment trust, which I own, doesn’t sound like an AI player, yet its largest holding is Nvidia.

Global funds are often sold as diversified, but many are heavily weighted towards the US and technology. Identifying these hidden concentrations is a start.

Genuine diversification is harder than it looks. Gold is a traditional haven but it has already risen strongly and it produces no income. Bitcoin is volatile and risky. Property, so beloved of UK investors, can be illiquid and is not a one-way bet. Prime London properties, long viewed as a safe haven, fell sharply in 2025. Cash may feel safe, but inflation erodes its real value, so it is best held strategically: As firepower to buy assets cheaply or as insurance, to avoid being forced to sell at a bad time.

Possibly the greatest benefit of being prepared is psychological. Investors who have taken steps to build resilience are less likely to respond emotionally if and when markets drop, and less likely to make bad decisions.

Private investors who have prospered by backing US technology may be reluctant to step back. But it is worth remembering the late Sir John Templeton, who observed that the only investors who do not need to diversify are those who are always 100 per cent right.