Worried About an AI Crash? Here’s How to Diversify Your Portfolio

Key Takeaways

• While many believe the AI trade has plenty of room to run, there are ways for investors to mitigate the risks to their portfolios in the event of more losses.
• Index investors can look beyond capitalization-weighted products to equal-weighted funds, as well as funds focusing on small- and mid-cap stocks.
• Strategists say that investors looking to broaden their sector exposure can look to healthcare, industrials, and financials.

Artificial intelligence stocks powered the market higher last year, even amid a growing chorus warning that the party can’t go on forever. Against this backdrop, some investors may find themselves looking for strategies to help cushion the blow of further losses. This will be especially important as the AI trade evolves.

Many strategists told us in mid-December interviews that they believed the tech rally still has legs, but risks are mounting.

“Markets are obviously becoming more discerning, identifying winners and losers more,” says James Ragan, director of investment management research at DA Davidson. He expects more volatility and warns investors against assuming that “everything is just going to keep going up.”

After a blistering rally that turned lows in April into record highs in October, the technology sector slowed last fall. Names linked to the AI trade took much of the rest of the market down with them. It was an uncomfortable reminder of the concentration risk that market pros have been warning about for the past two years. Just five tech stocks—Microsoft MSFT, Meta Platforms META, Nvidia, Tesla TSLA, and Oracle—were responsible for 40% of the index’s 5% drop between Oct. 28 and Nov. 20, for instance.

Strategists say that diversification strategies—regular rebalancing, equal-weighted funds, small-cap and value stocks, and branching into other sectors—can help cushion the blow of concentrated losses in AI stocks.

Practice Good ‘Portfolio Hygiene’

For Carol Schleif, chief market strategist at BMO Wealth Management, moments like this are good reminders for investors to check their “portfolio hygiene.” She describes this as a regular process of trimming holdings that have overperformed and reinvesting in less-loved but fundamentally attractive areas that may be overlooked, all while keeping a larger investment and risk strategy in mind.

Even investors who only own broad index funds may find themselves overallocated to tech, and those with actively managed holdings or individual stocks may be even more exposed. Anyone worried about an AI pullback can “think about cutting some of those back,” Schleif explains. While investors often make assessments like these at the end of the year, it’s reasonable to consider portfolio allocation questions at any time. That’s especially true with the market in record territory again, Schleif says.

Consider Equal-Weighted Strategies

But where should those proceeds go? Beyond tried-and-true diversifiers like cash and bonds, strategists say investors looking for a simple approach can consider moving away from market-cap-weighted products (which are heavily tilted toward the biggest names in AI) and into investment vehicles with different weighting strategies.

Gene Goldman, chief investment officer at Cetera, says an equal-weighted index fund rather than a cap-weighted fund can help investors avoid too much AI risk and take advantage of more attractive valuations. “You’re getting the same exposure but reducing some of the concentration risk,” he says.

Of course, this comes with a performance tradeoff. The Morningstar US Target Market Exposure Equal Weighted Index is up 13.6% since the beginning of 2025, compared with a 19.1% gain for the market-cap-weighted Morningstar US Target Market Exposure Index, which got a boost from a heavier tilt toward tech.

Look Beyond Large-Cap Growth

Investors can also find diversification in corners away from large-cap growth stocks. “The S&P 500 is not as broad as it once was,” says Ragan of DA Davidson. “One way to reduce that exposure is to look at the Russell 1000 Value Index, because that has a lot of the same companies, just in different weights.”

Strategists also point to small- and mid-cap stocks as good diversifiers heading into 2026. Small caps should get a boost as the Federal Reserve cuts interest rates, according to Cetera’s Goldman, and they could see even more upside if the economy proves stronger than expected. He thinks attractive mid-cap stocks could be good candidates for buyouts as M&A activity picks up and rates come down.

For some investors with more sophisticated portfolios, Goldman also likes liquid alternative investments—products whose managers “zig when the market is zagging.” Investors should remember that these tend to have higher risk and carry higher fees than many traditional investments.

Diversify Across Sectors

There are also notable opportunities in sectors beyond technology, though history shows that investors are generally poor judges of timing when purchasing sector-specific products. That said, strategists say it can be prudent to broaden beyond tech to sectors that might see outsize boosts from macroeconomic tailwinds or strong earnings, especially if worries about the AI rally persist.

“If investors are a little bit more nervous about technology, then it makes sense to us that that money will flow into some of these other sectors,” says DA Davidson’s Ragan. For example, while technology was the second-best-performing sector in 2025, it has been the second-worst-performing sector over the past two months.

Cetera’s Goldman says he likes healthcare stocks, which lagged far behind the rest of the market at the start of the year but boast attractive valuations and long tailwinds, stemming from an aging population and other macroeconomic factors. He also likes industrials, which he says could see a boost from investment in energy infrastructure, demand for AI technology, supply chain reshoring, and defense spending.

For BMO’s Schleif, there are opportunities to be found in the second- or third-tier beneficiaries of AI developments. Financials are investing heavily in AI and could see dramatic efficiency gains after deploying it. Cybersecurity firms, defense firms, and energy companies may also fall into that bucket.

Stay Diversified in Tech

Most analysts agree that enthusiasm for AI is unlikely to fade anytime soon, and many say these stocks have plenty more room to run. The big “hyperscaler” spenders are going to keep spending, and the sector will continue to perform well if earnings growth holds up.

“We’re not saying to get out of tech,” says Ragan of DA Davidson. “That’s still going to be a decent place to be going forward, but you do want to manage the exposures and just not get too overweight.” Cetera’s Goldman also likes the tech sector despite concerns about valuations, pointing to a buildout phase that remains in its “early innings” as businesses invest in data centers, cloud infrastructure and semiconductor capacity.

While earnings growth may spread to other sectors this year, Ragan still expects tech to lead the way in the fourth quarter of 2025 and in 2026.

He reiterates that investors should prepare for “winners and losers” in the industry. BMO’s Schleif says such discernment is a good sign, since it’s “not bubblelike behavior.”

Volatility Ahead

But even if there’s no bubble to pop, the bumpy ride may continue. “We do expect pullbacks and more volatility,” says Cetera’s Goldman. Against the backdrop of a still-strong economy, incoming fiscal and monetary stimulus, and strong earnings growth, he thinks investors should treat those pullbacks as buying opportunities.

Even as Big Tech has stuttered, the broader market is still up 17% so far this year and up 5% over the past three months. DA Davidson’s Ragan thinks that may give investors some comfort that tech stocks can underperform while the market as a whole holds up.

Zooming out even further, strategists emphasize that pullbacks are normal throughout history. BMO’s Schlief explains that some healthy perspective, a well-diversified portfolio, and a long-term plan can help investors stomach the volatility: “It’s about getting your psyche in shape … it all depends on what’s going to allow you to be able to sleep at night.”