How to Invest in the AI Boom

Most people can see there’s an AI boom. On that, they’re probably right. Whether they’ll actually make any money out of being right is a different question, and for most of them the answer is no.

The usual instinct is to go hunting for the winner. The next Nvidia. The one stock that rides the whole wave. It feels like the smart move, and it’s the fastest way to get hurt.

Go back to the dot-com boom. Everyone was right that the internet would change the world. It did. But most of the companies people bet on, Pets.com, Webvan, eToys, didn’t make it. The theme was spot on. The stocks still went to zero. There were far more losers that looked like winners than there were actual winners, and almost nobody could tell them apart at the time.

AI will be no different. A handful of enormous winners, and a graveyard of companies that looked unstoppable right up until they weren’t. Being right about AI and being right about which AI stock to own are two completely different things. Professional investors typically don’t bet on picking the one winner. Nor should you.

So don’t pick. Back the whole theme instead.

That’s what a fund, usually an ETF, is for. It lets you buy a basket of the whole field in one purchase rather than a single stock. If you believe semiconductors as a whole are going to do very, very well, you don’t need to pick the individual companies. There’s a basket for that. If you believe the world is going to spend more and more on cybersecurity, there’s a basket for that too, built to benefit from that rising global spending. You get the whole sector, winners included, without having to work out in advance which names come good. For most people, that’s the most sensible way to play a theme they believe in.

Then do the one thing almost everyone forgets. Size it properly.

A theme you believe in should be a position in your portfolio, not the whole portfolio. This is simply how a portfolio is managed properly: you take exposure to a theme, you don’t pour everything into it. Keep the position to a size that isn’t too hot to handle, so a big swing either way doesn’t ruin your week or your sleep. If it flies, you’ll be glad you were in. If it falls, it’s a scratch, not a wound.