AI Financial Planning, Market Bubbles and What Historical Patterns Reveal for Today’s Investors

Few topics have been more divisive in investment conversations than Artificial Intelligence and AI financial advice.

Some use AI daily in the home and work life, for others, it remains an abstract solution, a powerful idea that is both exciting and unsettling in equal measure. For the last 12-24 months, AI in financial planning has been a hot topic.

The question is, are we in an AI bubble?

Yes, we are, but not necessarily a financial one. If we look at the impact of AI on markets such as the Nvidia Share Index or other companies emerging in that market, there are some higher-risk investment options. (Adrian, 2024)

What defines a market bubble?

In simple terms, a market bubble occurs when asset prices are driven beyond fundamentals, fuelled by a compelling narrative, optimism, and a growing belief that this time will be different.

Nobel laureate Robert Shiller has written that bubbles are driven less by spreadsheets and more by stories — what he calls “narrative economics”. These narratives spread quickly, shape behaviour and can become self-reinforcing, particularly in a world of instant information and social media.

Andrew Ross Sorkin explores similar themes in his book 1929, where he explains that bubbles tend to share common features: abundant liquidity, easy credit, rising speculation and a growing conviction that traditional financial rules no longer apply.

History offers no shortage of examples — from Dutch tulip mania in the 1630s, to the South Sea Bubble, the dot-com boom of the late 1990s and the US housing market prior to 2008. Each differed in its detail, but the psychology behind them was remarkably similar. (Iero, 2024)

Importantly, bubbles are rarely obvious while you’re living through them. It is only with hindsight that they appear inevitable, neat and clearly defined.

Are all bubbles the same?

No, and not all bubbles carry the same implications for investors.

One of the most useful distinctions comes from investor Howard Marks, who differentiates between “mean reversion bubbles” and “inflection point bubbles”.

Mean reversion bubbles are where the real danger lies. These are periods where assets promise returns without risk, valuations become detached from reality, and speculation replaces investment. When they burst, the world largely reverts to how it was before — with little lasting benefit and significant wealth destruction. The subprime mortgage crisis of 2008 and the tulip mania are clear examples. (2008 Financial Crisis, 2008)

Inflection point bubbles are different. These occur when investors believe — often prematurely and with excessive enthusiasm — that the future will be meaningfully different from the past. Valuations may overshoot, and capital can be lost, but the underlying change tends to endure. The dot-com bubble is a useful reference point: many companies failed, but the digital transformation itself did not reverse. (Perez, 2003) (Marks, 2026)

This distinction, however, does not provide certainty, but it offers a more helpful framework than simply asking whether we are “in a bubble”.

Planning for bubbles: why the advice doesn’t change

When faced with talk of bubbles, booms and potential busts, it is tempting to think the right response must be action. In reality, good financial planning means the advice rarely changes — even when the headlines do.

From a planning perspective, the focus remains on what can be controlled:

● Starting with a clear financial plan. Ongoing conversations about goals, lifestyle, and income needs ensure portfolios are appropriately positioned from the outset.

● Revisiting risk and required returns. Cash flow forecasting helps determine how much return is actually needed, allowing adjustments to asset allocation or solutions where appropriate – whether that means reducing risk or introducing greater certainty through tools such as annuities.

● Avoiding market timing. A disproportionate share of long-term investment returns often comes from a small number of strong days, which are impossible to predict and frequently occur close to the worst ones. (Perils of Timing Volatile Markets, 2025)

● Maintaining appropriate cash reserves. Holding emergency funds and short-term income outside of portfolios reduces the risk of being forced into poor decisions during market downturns.

Rather than predicting the next bubble or crash, the emphasis remains on building a plan that is resilient enough to absorb uncertainty.

A final thought

History may not repeat itself exactly, but it does tend to rhyme. The reason that history does not typically repeat exactly is that the variables that influence the outcomes are often different. The causal effect is similar to predicting market crashes. The crash will happen, but the when and how may be different.

Markets will always be shaped by new narratives, new technologies and human behaviour. The role of financial planning is not to forecast the future, but to create a structure that allows investors to navigate uncertainty with clarity and discipline. (Steenkamp, 2024)

A well-built financial plan focuses less on headlines and more on the life it is designed to support – and that perspective becomes especially valuable when enthusiasm or fear dominates the conversation. Contact the team at Smith & Pinching to discuss maximising your investments even in a world of AI.

References

Adrian, T. (September 6, 2024). Artificial Intelligence and its Impact on Financial Markets and Financial Stability. International Monetary Fund. https://www.imf.org/en/News/Articles/2024/09/06/sp090624-artificial-intelligence-and-its-impact-on-financial-markets-and-financial-stability

Iero, J. (2024). Tulip Mania: Lessons from a 17th Century Economic Bubble. World History Journal. https://worldhistoryjournal.com/2024/10/06/the-tulip-mania-a-blooming-bubble-of-17th-century-holland/

Marks, H. (2026). Is It a Bubble?. Oaktree Capital Management. https://www.oaktreecapital.com/insights/memo/is-it-a-bubble

(June 30, 2025). Perils of Timing Volatile Markets. Wells Fargo Investment Institute. https://www.wellsfargoadvisors.com/research-analysis/reports/policy/volatile-markets.htm