AI's Ascent: Boom or Bubble?
The third quarter of 2025 has been markedly shaped by the pervasive influence of Artificial Intelligence (AI), which continues to redefine industries and dominate financial news cycles. Companies spanning chipmakers like Nvidia, to technology behemoths such as Microsoft and Google, and even established entities like Oracle, have witnessed significant surges in their AI-related stock values. This enthusiasm has notably propelled the S&P 500 index to unprecedented highs, underpinned by reports of robust earnings and AI's palpable impact on business operations. The underlying excitement is undeniably legitimate, reflecting genuine innovation and transformative potential.
However, even profound technological revolutions can precipitate market anomalies, including speculative bubbles. A critical concern arising from this period is the historically high valuation of stocks, which now surpasses the peaks observed during the dot-com era. This environment fosters what is known as concentration risk. By mid-2025, the ten largest constituents of the S&P 500, predominantly AI-driven companies, accounted for nearly 40% of the index's total market capitalization. This level of concentration exceeds that of the dot-com bubble, raising apprehension that any significant downturn in a few dominant players could reverberate throughout the broader market. For investors, the prudent course of action remains to adhere to a well-defined financial plan. If personal financial objectives remain unchanged, drastic portfolio adjustments are rarely warranted, as most diversified portfolios inherently possess AI exposure. The emphasis should be on data-driven decisions rather than succumbing to headline-induced impulsivity.
Overcoming FOMO: Anchoring Your Strategy in a Noisy Market
In an environment where markets frequently reach new milestones and AI consistently garners attention, the pervasive "Fear of Missing Out" (FOMO) can easily influence investment decisions. Discussions about "the next Nvidia" are common, fostering a sense of urgency to chase rapidly appreciating assets. However, historical patterns demonstrate that pursuing trending investments often leads to suboptimal outcomes. Examples such as the meme stock phenomenon of 2021 or the dot-com bust of the early 2000s illustrate how late entrants typically buy at elevated prices and are compelled to sell at significant losses. Conversely, investors who maintain discipline, regularly rebalance their portfolios, and disregard market noise tend to achieve superior long-term results.
Behavioral finance insights highlight an inherent human tendency to buy during periods of collective excitement and sell during panic. Counteracting this instinct, or at least maintaining a steady course, is crucial for sustained financial success. Research from institutions like Vanguard and Dalbar consistently indicates that investors often hinder their own performance through emotional reactions. Instead of reactive adjustments, a periodic portfolio check-up is advisable to ensure alignment with financial goals and risk tolerance. Updating risk questionnaires provides a clearer perspective on an investor's current standing, reinforcing the importance of a steadfast plan coupled with patience.
Retiring at Market Highs: The Significance of Your Starting Point
For individuals approaching or already in retirement, a period of strong market performance can instil a sense of confidence regarding their portfolios. While gratifying, market highs can also lead to overconfidence, potentially paving the way for imprudent decisions. A fundamental principle in retirement planning is the significance of the market's starting point. Although stocks have historically yielded an average annual return of approximately 10% over extended periods, this figure is an average, encompassing cycles of both above-average and below-average returns. Retiring during a phase characterized by high valuations, such as the present, often precedes subsequent decades of lower-than-average returns. This scenario, an inconvenience for long-term accumulators, can become a critical challenge for retirees who are actively withdrawing funds from their portfolios, as the impact of weak returns is compounded by withdrawals.
Consequently, evaluating current asset allocation is paramount. If a traditionally 60/40 stock-to-bond portfolio has shifted to a 70/30 split due to recent equity gains, rebalancing to trim stock exposure and secure profits is a sound strategy. This does not necessitate an ultra-conservative stance but rather a return to an allocation consistent with the financial plan. The "bucket approach," which segregates assets based on short, intermediate, and long-term liquidity requirements, offers a structured method for managing income and weathering market fluctuations. While equity exposure remains essential for retirees given increasing longevity and persistent inflation, recent studies, such as those by Vanguard, reveal record-high stock allocations among those nearing or in retirement, posing additional risks if the market enters a prolonged period of subdued returns. Personal financial plans, cash flow strategies, and individual investment personalities should always dictate asset allocation, eschewing generic "rules of thumb."
Deep Dive: AI, Market Concentration, and Prudent Investing
The ongoing discourse surrounding AI often oscillates between defining it as a revolutionary force or a speculative bubble. While the rapid surge of AI-related tech stocks is underpinned by tangible earnings growth and innovative advancements, cautionary signals are evident. Valuations for leading AI stocks frequently range from 30 to 50 times earnings, figures reminiscent of the dot-com era, which eventually culminated in a severe market correction despite the internet's revolutionary impact. Furthermore, market concentration remains a notable concern, with the top 10 S&P 500 stocks comprising a significant portion of the index, making the overall market susceptible to the performance of a select few.
Historical precedents suggest that market leadership is cyclical. Companies that dominate one era rarely sustain that dominance indefinitely, facing challenges such as market saturation, regulatory scrutiny, and internal competition. Nvidia, a current AI leader, exemplifies this dynamic by enabling its customers to develop their own AI infrastructures, which could eventually impact its pricing power. For investors, the key is not to chase fleeting trends. A well-diversified portfolio inherently incorporates exposure to emerging technologies like AI. Rebalancing strategies, such as trimming gains from over-weighted stock allocations, can reinforce the fixed income or cash components of a portfolio, providing a buffer against future volatility and capitalizing on current higher yields. Diversification into equal-weighted indexes, value stocks, or international markets can further mitigate concentration risk.
Portfolio Check-Up: Staying Grounded Amidst Market Exuberance
Before making any significant portfolio adjustments driven by current market trends, a methodical review of one's financial plan is essential. This acts as a reliable guide through market volatility. A comprehensive portfolio check-up should address the following:
- Changes in Financial Life: Have there been significant life events such as a new job, retirement, inheritance, or major expenses?
- Shift in Goals or Time Horizon: Have investment objectives or the timeline for achieving them changed?
- Alignment with Risk Tolerance: Is the current asset allocation appropriate—neither too aggressive nor too conservative—for one's comfort level?
- Recent Rebalancing: Have portfolio gains been trimmed or underweighted areas supplemented? (Note: SEM provides automated rebalancing.)
- Updated Risk Questionnaire: Is the SEM Risk Questionnaire current? It is recommended to complete it annually at Risk.SEMWealth.com.
- Automated Investments/Withdrawals: Is there a system for automating contributions or withdrawals to minimize emotional decision-making?
- Ignoring Market Noise: Is one effectively filtering out hype surrounding speculative assets like AI, crypto, or meme stocks, focusing instead on a coherent strategy?
Fundamentally, if an investor's financial plan remains consistent, their portfolio allocation typically should too.
Crypto's Resurgence: Navigating Digital Assets in 2025
The third quarter of 2025 has also witnessed a significant resurgence in the cryptocurrency market, with Bitcoin notably surpassing the $125,000 threshold. This renewed enthusiasm is partly attributable to a more crypto-friendly political climate following the 2024 U.S. elections, which fostered expectations of clearer regulatory frameworks. The approval of the first spot Bitcoin ETFs by the new SEC leadership, attracting over $60 billion in nine months, underscores substantial institutional and retail demand. Even Federal Reserve Chair Jerome Powell has acknowledged Bitcoin's emerging legitimacy, likening it to "digital gold" as a store of value. Despite this positive momentum, the crypto market remains inherently volatile and speculative. Bitcoin's price history is characterized by dramatic swings, and many smaller cryptocurrencies lack long-term viability. The return of "FOMO" suggests a speculative fervor that may outpace fundamental realities.
Key risks include extreme price volatility, which mandates readiness for substantial fluctuations. Regulatory uncertainty persists globally, with new rules or crackdowns capable of disrupting markets. Speculative excesses, evidenced by the rapid rise of various niche coins, highlight the potential for numerous project failures within this nascent industry. For the everyday investor, a pragmatic approach to crypto involves allocating it as a small, speculative component of a highly diversified portfolio—akin to a "hot sauce" rather than a main course. Investments should be limited to amounts one is prepared to lose without jeopardizing financial goals. Safer avenues for exposure, such as regulated spot Bitcoin ETFs or investments in blockchain-focused stocks and funds, can mitigate some technical and security risks, though they do not eliminate market price volatility. A focus on underlying fundamentals and adherence to personal financial plans are crucial, prioritizing long-term discipline over short-term excitement.
SEM's Digital Asset Portfolio: Bridging Innovation and Risk Management
In response to evolving investor needs, SEM Wealth Management introduced its Digital Asset Portfolio (DAP) in August. This portfolio is designed to provide exposure to the promising frontier of digital assets while adhering to SEM's established "Behavioral Portfolio" framework. Rather than focusing solely on individual cryptocurrencies, SEM believes that long-term opportunities lie in companies adopting blockchain technology and those developing the supporting infrastructure. The DAP comprises diversified components:
- Bitcoin and Ethereum exposure for targeted growth potential.
- Blockchain-focused ETFs to capture innovation and sector stability.
- Digital infrastructure ETFs to benefit from the broader technological ecosystem.
This balanced strategy aims to capitalize on digital asset upside while systematically managing risk through diversification and disciplined rebalancing. An interesting synergy is the overlap between AI and digital assets. Both sectors are heavily reliant on advanced computing, cloud services, and data centers, with key players like NVIDIA, Microsoft, and Amazon contributing significantly to both ecosystems. Investing in digital infrastructure ETFs often provides incidental exposure to AI, demonstrating that technological advancements are rarely confined to isolated silos but rather converge and reinforce each other. While the DAP is not specifically an "AI" portfolio, it benefits from the broader technological currents driving both digital assets and AI innovation.
Key considerations for investors contemplating digital assets include recognizing their potential for high growth, innovation, and diversification, balanced against inherent volatility, complexity, and regulatory risks. Acknowledging the potential for significant drawdowns (50-80% or more) is crucial. Digital assets should occupy the "alternative" or "speculative" portion of a portfolio, with a general recommendation of no more than 10% of the total investment portfolio. The minimum investment for the DAP is $5,000, necessary for allocation across various ETFs. This investment is not a "get-rich-quick" scheme but rather a long-term play with substantial rewards potential, accompanied by commensurate risks. Investors must believe in the long-term prospects of the industry and allocate funds that are not critical for financial plan needs within the next 15-20 years. Detailed information, including a Morningstar Portfolio X-Ray highlighting hypothetical returns and critical drawdowns, is available for further review, emphasizing the importance of understanding risk before investing.
About ENCORE
ENCORE is a Quarterly Newsletter provided by SEM Wealth Management, standing for: Engineered, Non-Correlated, Optimized & Risk Efficient. Through the integration of these principles in its management philosophy, SEM aims to deliver effective risk management and capital appreciation for its clientele. Each edition of ENCORE offers valuable insights into investment strategies and the firm's approach to money management.
The information presented is for informational purposes exclusively and should not be construed as investment advice. Data sourced from third-party providers is believed to be accurate, though its precision cannot be guaranteed. Past performance does not serve as a reliable indicator of future returns. For additional details, please consult the individual Model Factsheets. All security investments, including those managed by SEM, carry the inherent potential for both losses and gains. SEM's firm brochure (ADV part 2) is available upon request and must be furnished prior to the establishment of an advisory agreement.
