AI is clearly one of the biggest investment stories in the market right now. The money being spent on chips, data centers, energy and infrastructure is enormous, and I believe in AI. I expect it to be a meaningful part of business for years to come, in ways we probably haven’t even thought of yet.

But believing in AI and believing every investment tied to AI is a great investment are two very different things. That distinction matters.

The Buildout Is Expensive

Data centers require massive amounts of capital, from advanced chips and construction materials to cooling systems and energy infrastructure. As AI infrastructure continues to expand, that additional demand for electricity could place further pressure on energy costs and the systems needed to support it.

At the same time, many AI companies are spending heavily today with the expectation that those investments will eventually generate significantly greater revenue and profits. That may happen, but a technology can be transformative and still become overvalued as an investment theme. That is not a prediction about what happens next. It is simply something we believe investors should keep in mind.

Another important question is how the global competition develops. The United States has significant advantages in areas such as advanced chips and technology, while countries such as China continue to invest heavily in energy and infrastructure. Can U.S. innovation continue to improve efficiency and lower computing costs, or will access to abundant, lower-cost energy become an increasingly important advantage? We don’t think anyone can answer that with certainty yet.

Two Things We’re Watching Closely

Interconnected financing: Some companies within the broader AI ecosystem have invested in or financed other companies in the space, which may then use that capital to purchase products or services from companies within the same ecosystem. That does not necessarily mean anything is wrong, but in our view, it does make parts of the AI buildout more interconnected than they might first appear.

If one important piece fails to meet expectations, it is worth considering how that could affect others. 

Global competition: The U.S. currently holds meaningful advantages in areas such as advanced chip design and AI technology, while China and other countries continue to expand energy and infrastructure capacity. The important point for investors, in our view, is not to assume that the eventual outcome of this competition has already been decided.

We’ve Seen a Version of This Before

I was managing client portfolios through the dot-com bubble and the market decline that followed in the early 2000s. The internet did go on to change the world, but that did not mean every internet-related investment made during the boom turned out to be a good investment. Even some of the companies viewed as the “picks and shovels” of the technology boom experienced significant losses when the cycle turned.

That experience matters to me today. It is easy to look at a 25-year-old market chart and say the market eventually recovered. Living through a major downturn is very different, particularly for someone who has recently retired and is relying on that portfolio to help fund their lifestyle.

Predicting the next bubble is extremely difficult, and I am not suggesting that today’s AI buildout will follow the same path as the dot-com era. But ignoring the possibility of significant risk may not be prudent either.

How We’re Approaching It

This is not a suggestion to avoid AI exposure altogether. That would be difficult for most broadly diversified investors, and we believe AI could create meaningful long-term value across parts of the sector. It is also not a suggestion that investors simply move into the “picks and shovels” of AI and assume those investments are automatically safer. History reminds us that companies supporting a major technological buildout can face risks too.

Instead, our approach is what it has always been: every holding in our investment models is subject to ongoing review. We regularly evaluate whether our exposure to a particular company, sector, region or investment theme, AI included, continues to fit our clients’ goals, time horizons and tolerance for risk.

Sometimes that review may lead to an adjustment, and sometimes it may reinforce the decision to maintain the current allocation. The important part is continuing to ask the questions rather than assuming that what has worked recently will continue indefinitely.

Let’s Talk About Your Portfolio

If you are approaching or living in retirement and would like a second opinion on how your portfolio is positioned relative to your goals, we would be glad to start a conversation. Contact Hamilton Wealth Management to learn more or schedule a complimentary introductory meeting.