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Given the tremendous growth of the AI sector in recent years, it’s understandable that investors have been drawn to AI opportunities— while others are worried that skyrocketing company valuations could turn into an AI bubble. By some estimates, in 2026 the AI market is predicted to grow by 120% year-over-year.
Fortunately, there are strategies that some investors can consider that offer some exposure to AI growth potential, while still providing some protection from a downturn.
Key Points
• AI stocks have seen tremendous growth, but some investors are wary about the possibility of an AI bubble.
• A “pick and shovel” strategy involves investing in AI-adjacent companies — such as semiconductor manufacturers and data center operators — rather than AI companies directly.
• Portfolio diversification away from AI can include investing in consumer staples, precious metals funds, food production stocks, or other sectors with less exposure to AI technology.
• Some investors can help protect against an AI downturn by regularly rebalancing their portfolio to adjust AI sector weighting, and by using stop-loss orders to automatically limit losses if AI stocks decline.
• Shorting the AI sector is possible through options or by investing in companies that may benefit from AI’s decline, but this strategy carries significant risks.
Is There an AI Bubble in 2026?
As of Q2 2026, an AI bubble is not yet evident. But AI companies and related stocks have been on a tear over the past couple of years, and for some investors these conditions have evoked concerns about the market overheating. There have been numerous stock market bubbles before — the dot-com bubble in the early 2000s, for example — and there are likely to be more bubbles in the future.
Still, AI technology is being adopted at a mass scale by individuals and enterprises, and private investment continues to grow: conditions that don’t always lead to a bubble. Global corporate investment in AI more than doubled in 2025, according to Stanford University.
That said, generally some investors tend to exercise caution in the face of market trends, whether they’re investing online or by other means, given that the aim for many investors is to find ways to benefit by investing in AI stocks while also protecting their broader portfolio. There are some strategies that may help do just that.
Recommended: Investing in AI Stocks
How to Hedge Against AI Volatility in Your Portfolio
As noted, there are strategies that can help investors hedge AI in their portfolios. They include a “pick and shovel” approach, as well as understanding diversification.
The “Pick and Shovel” Strategy: Investing in AI Infrastructure
A pick-and-shovel strategy involves investing in companies or sectors that may be adjacent or related to the growing AI industry, but are not information technology companies themselves. This could be considered a type of thematic investing.
“Pick and shovel” refers to the days when entrepreneurs would supply would-be goldseekers with picks and shovels for goldmining — those entrepreneurs were making money from the gold rush, but not from gold itself.
Accordingly, the same strategy may be applied to AI when trading stocks. The business of artificial intelligence depends on countless sources of power, in addition to specific types of infrastructure. These may include types of precious metals, as well as electricity, data, and processing power. Investors using a pick-and-shovel strategy may look at semiconductor companies, electricity generators, companies operating or building data centers, as examples.
Defensive Sectors That Don’t Depend on AI Growth
Investors can also consider a strategy that involves diversification — specifically, diversifying their portfolio away from the AI sector. There are numerous ways to do this, but in broad strokes, it could involve buying ETFs online, mutual funds, or stock trading in less volatile sectors.
For example, investors could consider consumer staples, healthcare, stocks of companies that produce food, or almost anything else — with the goal of being distanced from the AI sector.
What Are Some Ways to Diversify Your Stock Portfolio Right Now?
Diversification can be viewed as an effective and direct way to hedge against AI if an investor is worried about a bubble, and interested in active stock trading. Here are some ways to do it.
Balancing Tech Growth with Value Stocks
One strategy could involve the creation of a balance between value stocks and tech-oriented growth stocks in a portfolio. Value stocks are shares of companies that may be trading below their intrinsic value — that is, they’re undervalued by the market and have some growth potential.
Growth stocks, on the other hand, are shares that investors expect may increase their earnings or revenue at a faster pace than the broader market, although future performance is uncertain.
Of course, both types of stocks have their risks, but striking a balance in a portfolio with both types may help provide some cushion from a potential AI stock decline.
Exploring Bonds and Fixed Income
Another common diversification tactic is to dedicate a portion of your portfolio to fixed-income assets such as bonds. While there may be bonds that have some sort of exposure to the AI and tech sectors (such as corporate bonds, or municipal bonds from areas with a heavy AI presence), there are other bonds or bond funds that could help hedge against an AI downturn.
How to Help Protect Your Investments From an AI Stock Crash
Additionally, investors can consider regular rebalancing and using trading tools, like stop-loss orders, to manage risk.
Rebalancing: Why to Check Your Tech Weighting
As previously mentioned, rebalancing a portfolio at regular intervals can be helpful when hedging against AI — or other types of market risks. Specifically, investors can consider assessing how much of their portfolio may have exposure to AI.
From there, some may decide to adjust their investment mix if their portfolio no longer reflects their intended allocation. Investors take different approaches to reviewing their portfolios, and the timing of those reviews often depends on their strategy, goals, and individual circumstances.
Using Stop-Loss Orders to Manage Downside Risk
Another tactic some investors may look into is using stop-loss orders to manage risk. This means that an investor is inputting a command with their brokerage or on their investing platform that automatically performs an action when certain conditions are met.
For example, if an investor has 100 shares of AI Stock A, and it is gaining value, but the investor is afraid of a price drop, they can assign a stop-loss order to sell the stock. That order will execute if AI Stock A’s value hits a certain level, effectively “stopping” any additional “losses” in value.
Can You Short the AI Bubble?
For investors wondering if they can short the AI bubble, the answer is yes; it’s possible to short just about anything. But shorting a stock involves considerable risk, and because the AI market can be volatile and unpredictable, a short position may result in losses if the stock moves higher rather than lower.
For investors who want to short the AI sector, you could consider identifying stocks of companies that may benefit from AI’s decline. Or, you could engage in options trading that allows you to wager on a price decline of certain AI stocks.
Understanding the Risks
There can be considerable risks associated with shorting stocks, and a lot of those risks depend on the specific instruments investors use to short. If you’re using a type of derivative like options to take a short position, there’s the potential for short squeezes and nearly limitless losses.
For instance, and if you’re borrowing money to short — trading on margin — you could be subject to a margin call. Shorting a stock is a high-risk strategy that’s best suited to experienced investors. You can learn more by checking out a guide to high-risk investments.
The Takeaway
The AI sector does not appear to be in a bubble, but investors looking to hedge against AI stocks in anticipation of a potential market decline can employ different strategies to help protect their portfolios. Investing in AI-related companies may provide lower risk exposure with some market return; diversification is another strategy to consider.
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FAQ
What does it mean to “hedge” against AI?
Hedging means using a strategy to limit potential losses from investing in a certain sector or stock. If you’re hedging against AI, it means you’re using strategies or types of investments to protect your broader portfolio from losses related to AI stocks.
How can I tell if an AI stock is overpriced?
To gauge whether a stock is overpriced, research the stock’s fundamentals and the company’s performance, to get a sense of how much hype there is around an AI stock. If it is overvalued relative to similar stocks, that can be an indicator.
Are there specific ETFs that help diversify away from tech?
There are numerous ETFs that can help investors diversify their portfolios, and avoid being overweight in the tech industry. For example, there are broad market ETFs that track wider swaths of the market, or ETFs that invest in industries unrelated to tech.
Should I sell all my AI stocks if I’m worried about a crash?
If you’re concerned about a potential downturn, there are different approaches to consider. Reducing or eliminating exposure to AI stocks could lessen the impact of a decline, but it may also mean missing future market movements if those investments increase in value. Investors sometimes reassess whether their current allocation and level of diversification continue to align with their investment strategy and risk tolerance.
How often should I rebalance my portfolio to stay protected?
The frequency with which you rebalance your portfolio will depend on your specific strategy, goals, and risk strategy. A good rule of thumb may be to consider rebalancing every several months or so, or to speak with a financial professional for guidance.
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