6 steps to protect my pension from a stock market ‘bubble’

Are we in a market bubble? It depends on what you’re reading or whom you ask

Some valuation measures suggest the US market is more expensive than at almost any other point in history, perhaps beginning to match levels seen during the dotcom boom or before the 1929 crash.

Yet ask a technologist and they may tell you we are on the foothills of a once-in-a-generation investment boom, driven by advances in artificial intelligence (AI) through to the frontier of space commercialisation. This time it is different, they say.

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As the billionaire investor Warren Buffett, a veteran of nearly eight decades of boom and bust, once said: ‘As bandwagon investors join any party, they create their own truth - for a while.’

For the average individual investor, the response to these versions of the truth can see-saw in our heads daily: ‘I should be reducing my exposure to all this froth. But I have a terrible fear of missing out.’

I have been battling my FOMO - a nagging trait we investors must constantly fend off - and have taken steps that felt sensible for my portfolio and my aims. They may not be right for you, and a financial adviser will be best placed to judge your specific situation. For me, it is part of how an engaged DIY investor tweaks a portfolio to retain balance and improve outcomes - by being constantly aware of valuation.

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1. Adjust geographically from expensive to cheap

I closely watch valuations and nudge my portfolio away from expensive stock markets and toward cheaper ones. One measure is a comparison of current prices to average inflation-adjusted earnings over the past ten years. Known as CAPE - cyclically adjusted price-to-earnings - it is a more sophisticated twist on the more commonly used price-to-earnings ratio. As with p/e ratios, a lower number suggests better value.

Historically, lower CAPE valuations have tended to be associated with stronger returns over the following decade or more. That is not a forecast of the future, but an observation. As the table below shows, published by Taunus Trust, a German investment company, real returns from the US stock market have been around 12% or 13% for investments made when CAPE was below 15, but -0.2% on the rare occasions it has been above 30. It is currently at 40, according to data from Research Affiliates.

Bear in mind that these annual returns factor in inflation making the 4.9% figure for the UK, when CAPE was 15-20, pretty decent. The UK market is currently on a CAPE of 17.5, according to Research Affiliates. I have angled my own portfolio toward the UK but also toward Europe, on a CAPE of 21.5, and emerging markets, which are on 22.2 but were much cheaper last year (more on this below).

CAPE vs subsequent 10-to-15-year annual average stock market returns

^{Source: Shiller, Refinitiv, Taunus Trust. Based on data from 1979 to 2026.}

2. Trim your winners

It is difficult to sell investments that have served you well. One compromise is to slice away some of the hotter areas of your portfolio, locking in profits and restoring some balance.

For example, the share price of Scottish Mortgage, a trust that invests in rapid technological change, has risen by 43% in the past six months (01/06/26), a remarkable run. A large proportion of the portfolio backs private companies, including Elon Musk’s SpaceX and Anthropic, the AI company behind Claude. Edinburgh Worldwide, another investment trust run by Baillie Gifford, is also heavily invested in technological innovators.

I have trimmed my Scottish Mortgage exposure, taking it from 9% to 6% of my pension, and sold Edinburgh Worldwide. I also plan to reduce the modest amount I have in the VanEck Space Innovators exchange-traded fund (ETF), which has handed me a 76% return this year.

These decisions alone have left me feeling more relaxed about what might happen next.

3. Check your emerging markets funds for AI exposure

Emerging markets (EM) were regarded as cheap up until this year. A recent surge in prices has narrowed much of that valuation gap. Much of the rally has been driven by three AI-related stock: Taiwan Semiconductor Manufacturing Company (TSMC), plus Samsung and SK Hynix of South Korea. The chipmaker stocks represent 14%, 8% and 7% of the EM index, respectively.

You may be deliberately investing in emerging markets for exposure to these stocks, but I suspect most people are not. I wasn’t and so have sold down some of the general EM funds I hold and reinvested some of the money into the BlackRock Latin American investment trust. The region remains cheap. Brazil, for example, is on a CAPE of 11, according to Research Affiliates.

4. Consider active over passive

Index-tracking funds have rightly surged in popularity due to their low cost and simplicity. However, during times of fervour, you may find your future fortunes overly beholden to a handful of oversized stocks. The so-called ‘Magnificent Seven’ in the US account for over a fifth of the MSCI World Index, which is commonly the basis for global tracker funds.

Nvidia is the top holding in the Legal & General Global Equity Index Fund, making up more than 5% of the portfolio. To labour the point, a £100,000 investment gives you about £5,000 of exposure to Nvidia. Would you choose to invest that much after the extraordinary rally it has enjoyed?

Funds that seek out undervalued stocks, known as value funds, could serve as a counterweight. Dodge & Cox Worldwide Global Stock, which makes our Fidelity Select 50 list of favoured funds, only holds two of the ‘Magnificent 7’ stocks in its top 10, for example.

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There is another, slightly more sledgehammer-like, approach to reducing your exposure to the concentration of stocks at the top end of the market - by putting some of your tracker money in so-called ‘equal-weighted’ index trackers. They spread your money evenly across all stocks within a given index rather than reflecting company valuations, as traditional trackers do. Examples include the Legal & General S&P 500 US Equal Weight Index Fund or the Invesco MSCI World Equal Weight ETF.

5. Increase your alternatives

Diversification is important at any time, but especially during periods of froth. You might consider modest allocations to real estate or infrastructure investment trusts. They may perform differently to stock market funds if a bubble were to burst. They also tend to pay relatively high levels of income. The International Public Partnerships investment trust is one example that I hold. It offers a yield of 5.7%, which isn’t guaranteed.

Gold remains the classic diversifier, especially during times of strife. I hold a small amount of my pension in the iShares Physical Gold ETC.

• Read: Gold: two charts that tell very different stories

You could also consider funds and investment trusts that aim at wealth preservation rather than the best returns. The Personal Assets investment trust, which I hold, has just over a third of its portfolio in shares and 44% in bonds.

6. Increase your cash holdings

For the very nervous investor, there is wisdom in moving some of the frothy profits you have realised into cash. You could park your profits in money market funds, also known as cash funds. These now mostly yield less than 4%, which is not guaranteed, and returns will change as interest-rate expectations shift.

The key problem with going to cash is that you may not hold your nerve if the market continues to inflate and you find yourself buying back in at a higher price. Or you may hold the cash indefinitely waiting for a crash that never comes. Our Fidelity Be Invested survey found UK investors aiming for annual returns of 9.2% a year over the next five years, yet they hold an average 17% of their portfolio in cash.

These are all conundrums we face as we wrestle with our investment biases and shifting perceptions of value. I find it helps to share them for the sake of our collective sanity, so please do reveal your own experiences in the feedback form below.

Most importantly, any revaluation of your portfolio is an opportunity to think about your actual aims - to consider the returns you need rather than those you want - and to make sure your investments still allow you to sleep at night.

Ultimately, I don't think this time is different.

This article was originally published in This is Money.

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• Read: The 10 best-selling ETFs in May
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• Read: The funds that already invest in SpaceX

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.