7 Moves to Make Before the AI Bubble Tests Your Portfolio
Open your 401(k) statement. Scroll to the holdings page. If you’re like most pre-retirees with a “diversified” S&P 500 fund, somewhere between 30% and 40% of your money is sitting in roughly ten companies, most of them tied to one story: artificial intelligence.
That’s not a hypothetical. The 10 largest stocks in the S&P 500 now account for about 41% of the entire index, a level of concentration not seen since at least 1980. Adobe is down 46% from its 52-week high. Meanwhile, Bank of America, the IMF, and the Bank of England have all flagged AI valuations as a risk to global markets.
If you’re 60 and planning to draw on this money in the next five years, that concentration matters more than it would’ve at 40. So what do you actually do about it? Not panic. Not sell everything. Just seven specific things, in order, before the headlines force your hand.
If you’re nearing or in retirement, the single biggest AI bubble risk isn’t a crash, it’s a poorly-timed crash. Build two to three years of expenses in cash and short-term bonds first. Then calculate your true tech concentration across all accounts, rebalance inside tax-advantaged accounts to avoid capital gains, harvest losses on individual AI names if you hold them, add international exposure, and stress-test your withdrawal plan against a 30% drawdown. Don’t go to cash. Don’t try to time the bottom.
1
Pull a single-issuer concentration report across every account
Before you do anything else, you need to see the actual numbers. Most people have no idea how exposed they are because their money is spread across a 401(k), an old IRA, a Roth, a taxable brokerage, and maybe a spouse’s accounts. Each statement looks fine in isolation. The aggregate doesn’t.
Add up your top 10 holdings across every account, including the underlying holdings of any index funds and target-date funds you own. Most major brokerages (Fidelity, Schwab, Vanguard) offer a free portfolio analysis tool that does this with a few clicks. If yours doesn’t, a financial advisor can run it in 15 minutes.
What you’re looking for is the percentage of your total investable assets sitting in any single stock. If Nvidia or Microsoft alone represents more than 5% of your retirement money, that’s a number worth knowing before the market decides for you.
This is the foundational step. Every other move on this list depends on knowing your real starting point.
2
Calculate your true technology weighting (not what your fund prospectus claims)
Here’s the part that catches people. A “diversified” S&P 500 index fund isn’t actually diversified the way it was in 2010. The five largest US companies make up roughly 30% of the S&P 500, the highest concentration in 50 years, and that was before AI spending really took off.
Your target-date fund probably owns those same names. Your “growth” fund owns those same names. If you also have direct positions in tech, you’re stacking exposure without realizing it.
A useful exercise: take your total stock allocation, then estimate what percentage is in the information technology sector plus communications services (which now includes Alphabet and Meta). For many “balanced” retirement portfolios, the answer comes back somewhere between 35% and 45%. That’s a tech overweight, whether you chose it or not.
Source: Wikipedia summary of AI bubble concentration data, citing late-2025 reporting from Bank of England and IMF.
3
Build two to three years of expenses in cash before you need it
This is the single most important defensive move for anyone within five years of retirement, and it has nothing to do with AI specifically. It’s about sequence-of-returns risk: the danger that a big market drop in the first few years of retirement permanently damages your nest egg because you have to sell into the decline to fund living costs.
Morningstar’s Christine Benz has long recommended retirees hold one to two years of portfolio withdrawals in cash, plus another five to eight years in high-quality bonds. The logic is simple. In a bear market, cash lets you avoid selling stocks at the bottom, giving the equity portion time to recover. After the dot-com crash, the S&P 500 took several years to fully recover. A retiree who’d been forced to liquidate stocks in 2001 and 2002 to pay the mortgage came out far worse than one who could draw from cash for two years.
If you spend $80,000 a year and Social Security covers $30,000 of it, your portfolio needs to fund $50,000. Two years of that is $100,000 in cash or money market funds. Three years is $150,000. Build the cushion now, while markets are still elevated.
You’re not trying to time anything. You’re buying yourself the option to sit still if things get ugly.
Source: Morningstar — The Bucket Approach to Retirement Allocation
4
Rebalance inside tax-advantaged accounts first
Once you know how concentrated you are, the question becomes: how do you trim without triggering a tax bill? The answer for most people is to do the work inside your IRAs and 401(k)s, where rebalancing doesn’t create capital gains.
Say your portfolio has drifted to 80% stocks and 20% bonds, and your target is 60/40. Don’t sell stocks in your taxable brokerage account, where you’d owe long-term capital gains tax. Instead, sell stocks and buy bonds inside your IRA or 401(k). The total portfolio rebalances, and you owe nothing in current taxes.
If you don’t have enough room in tax-advantaged accounts to fully rebalance, the next-best option in a taxable account is to sell positions you’ve owned less than a year only if they’re at a loss, or sell highest-cost-basis lots first to minimize the gain. Specific lot identification is a setting most brokerages let you change with a phone call.
The key takeaway: rebalance through your tax-deferred accounts first, taxable accounts last.
Selling appreciated stock funds in a taxable account “just to be safe” without modeling the tax bill first. The tax drag can easily outweigh the protection.
5
Harvest losses on individual AI names you hold
If you own individual stocks like Adobe, Salesforce, or other software names that have been beaten up in 2026, the silver lining is tax-loss harvesting. Adobe is down roughly 46% from its 52-week high; Salesforce is down about 31% year-to-date. If those positions sit in a taxable account at a loss, selling them generates a capital loss you can use to offset gains elsewhere, or up to $3,000 of ordinary income per year, with the rest carried forward.
Two rules to know. First, the wash sale rule: if you sell at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the IRS disallows the loss. The rule applies across all your accounts, including IRAs and your spouse’s accounts. Second, the workaround: you can sell Adobe and buy a different software ETF, or sell an S&P 500 fund and buy a Russell 1000 fund, to maintain market exposure without triggering the rule.
What you cannot do is sell at a loss in your taxable account and buy the same security in your IRA. That permanently disallows the loss because you can’t adjust cost basis inside an IRA.
Sources: Charles Schwab — Wash-Sale Rule | TIKR on Adobe drawdown
“International stocks could be poised for another strong year in 2026 due to accelerating global growth, attractive valuations and the potential for dollar weakness.”
Charles Schwab, 2026 International Outlook
6
Add international exposure while the dollar is weak
For more than a decade, holding international stocks felt like a tax on your portfolio. US large caps, especially tech, dominated everything. That trend cracked in 2025. The Morningstar Global Markets ex-US Index rose 32% in dollar terms while the US market gained 17%. The first half of 2025 saw the steepest half-year decline in the US dollar since 1991.
A weaker dollar boosts returns on international holdings for US investors because foreign earnings convert back into more dollars. Beyond the currency tailwind, international markets trade at meaningful valuation discounts to the US, and they’re far less concentrated in AI names. That’s the diversification.
A reasonable target for many retirement portfolios is to hold roughly one-third of equities in international stocks, split between developed markets (Europe, Japan) and a smaller emerging-markets allocation. Low-cost, broad index funds like Vanguard’s Total International Stock ETF (VXUS) cover thousands of companies for an expense ratio of around 0.05%. You’re not making a bet on Europe specifically. You’re making a bet against further US concentration.
Sources: Charles Schwab — 2026 International Outlook | Morningstar — Why International Stocks Still Matter
7
Stress-test your withdrawal plan against a 30% drawdown
Here’s a simple exercise that takes 30 minutes. Open a spreadsheet. Put your current portfolio value at the top. Cut it by 30%. Now ask: at your planned annual withdrawal rate, does this portfolio still last 30 years?
If you’re planning to withdraw 4% of a $1.5 million portfolio ($60,000 a year), a 30% drop takes you to $1.05 million. Now you’re withdrawing closer to 5.7% to maintain the same dollar amount. That’s the number that matters. Most safe-withdrawal-rate research, including Morningstar’s annual analysis, suggests rates above 5% start materially raising the odds of running out of money over a 30-year retirement.
You have three levers if the math gets uncomfortable. Cut spending temporarily (skip the inflation adjustment for a year or two during a downturn). Delay Social Security if you haven’t claimed yet. Rely on the cash bucket from move #3 so you don’t have to sell stocks at the bottom. The retirees who came through 2008 in the best shape were the ones who had built flexibility into their plans before they needed it.
Run the stress test now, not after a sell-off. The numbers feel different when you’re scared.
Common Questions
Should I sell my Magnificent Seven stocks now?
Not on autopilot. The right answer depends on whether they’re held in a taxable account (where selling triggers capital gains) versus a tax-advantaged account (where you can rebalance freely). It also depends on your overall concentration. A position that’s 2% of your portfolio doesn’t need the same scrutiny as one that’s 15%. Trim the largest concentrations first, ideally inside tax-advantaged accounts.
How much cash should a 65-year-old retiree hold?
Most financial planners recommend one to three years of portfolio withdrawals in cash, plus another three to seven years in high-quality short and intermediate-term bonds. The exact number depends on what percentage of your expenses are covered by Social Security and pensions. The more guaranteed income you have, the less cash you need.
Is the AI boom really a bubble?
Reasonable analysts disagree. Critics point to extreme concentration, stretched valuations (the S&P 500 trades at roughly 23 times forward earnings), and the Shiller cyclically-adjusted P/E ratio above 40. Defenders note that today’s AI leaders generate massive real profits, unlike many dot-com names. Whether or not it’s technically a bubble, the concentration risk for retirees is real either way.
Can I just move everything to a target-date fund and stop worrying?
Target-date funds help with rebalancing but don’t solve the concentration problem. Most own broad-market index funds, which means they hold the same heavily-weighted top 10 stocks as the S&P 500. They’re a fine default for younger investors but pre-retirees often need additional diversification beyond what a single target-date fund provides.
What about bonds? Aren’t they risky too with interest rates this high?
Short and intermediate-term high-quality bonds are paying yields they haven’t paid in over a decade. The 10-year Treasury was yielding around 4.27% in early 2026 (Source: 24/7 Wall St). The risk in long-duration bonds is real if rates rise further, but laddering Treasuries or holding short-term bond funds gives you both income and a buffer against equity drawdowns.
A conversation worth having
None of this is one-size-fits-all. Whether you should hold two years of cash or three, how much international exposure makes sense for your situation, when to harvest losses and when to hold, what to do with the company stock in your 401(k) that’s now worth more than it should be, all of it depends on numbers and goals that are specific to you.
Rules of thumb get you started. They don’t finish the job. If you’d like to walk through how any of this applies to your particular accounts, tax situation, and timeline, the team at Madison Partners is happy to have that conversation.
This content is for educational purposes only and should not be considered financial, tax, legal, or investment advice. Individual circumstances vary, and readers should consult with a qualified financial advisor, tax professional, or attorney before making decisions based on this information. Madison Partners does not guarantee the accuracy of third-party data cited herein.
