Many investors are wondering whether the market is getting ahead of itself, especially when it comes to artificial intelligence and technology stocks.

But perhaps the better question is not, “Are we in a bubble?” The better question may be, “How should we respond if we are?”

That was the focus of today’s conversation with Mark Biller, Executive Editor and Senior Portfolio Manager at Sound Mind Investing. With AI continuing to drive market enthusiasm, many investors are feeling both excitement and concern. The challenge is learning how to respond with wisdom rather than fear.

The AI story has been driving markets for several years. One clear example is the tech-heavy Nasdaq, which has risen sharply since the end of the 2022 bear market. More recently, many companies have reported rapid profit growth and have credited AI as a key factor.

That has encouraged investors because it shows AI is not merely hype. Companies across many industries are beginning to see real benefits from AI tools, including improved efficiency and increased profitability.

At the same time, the demand for AI computing power has caused certain sectors—especially semiconductor stocks—to soar. When any part of the market begins rising almost straight up, investors naturally become nervous. It brings to mind previous market manias that ended in painful declines.

Calling a bubble in real time is extremely difficult. Even when someone identifies one correctly, acting on that information too early can be costly.

Mark pointed to the late 1990s internet bubble as an example. Many investors suspected that Internet stocks were overheated long before the bubble actually burst. Federal Reserve Chairman Alan Greenspan famously warned about “irrational exuberance,” but that warning came more than three years before the market peak. Investors who sold immediately missed significant gains before the downturn finally arrived.

That illustrates an important point: even if a bubble is forming, that does not tell investors exactly what to do or when to do it.

Markets are forward-looking. Investors are pricing companies not only on current earnings but also on what they believe those companies may earn in the future. If expectations rise dramatically, stock prices often rise with them.

So it is possible that some parts of the market, such as semiconductor stocks, may be showing bubble-like characteristics while the broader market does not look as overheated. But the practical question remains: how should investors respond?

Most investors would love to avoid downturns without missing the upside. But in practice, that kind of market timing is extremely difficult.

Investors often make one of two mistakes. Some sell too early and miss major gains. Others wait too long and sell only after stocks have already fallen, and fear has taken over.

That is why a disciplined plan matters. Instead of trying to predict the exact top of the market, wise investors focus on staying invested while managing risk thoughtfully.

Historically, some of the market’s strongest gains occur late in bull markets. That does not mean investors should ignore risk, but it does mean that fear-based decisions can be costly.

One of the most practical ways to manage risk is through diversification.

A well-balanced portfolio helps reduce the risk of becoming overly exposed to a single hot sector. Mark offered a helpful way to think about it: if everything you own is rising at the same time, or if nothing you own is rising, you may not be truly diversified. But if some holdings are doing very well while others seem to be lagging, that may actually be a sign that your portfolio is properly balanced.

Diversification can feel frustrating when one part of the market is racing ahead. But its purpose is not to maximize every short-term gain. Its purpose is to help investors remain steady through a variety of market environments.

Another practical tool is rebalancing.

When one part of a portfolio has grown significantly, rebalancing allows investors to shift some gains out of fast-rising assets and back into areas that have not run up as much. This helps manage risk without requiring investors to predict the future.

Rebalancing also has an emotional benefit. It gives investors a clear process to follow. Instead of asking, “Should I sell everything?” they can simply make measured adjustments in line with their plan.

That kind of discipline can help investors avoid impulsive decisions driven by fear or excitement.

Investors also need realistic expectations. Markets do not move up in a straight line forever. If you stay invested in strong-performing sectors, there is a good chance you will eventually give back some gains when leadership changes or when a bear market arrives.

That is part of investing.

The goal is not to avoid every decline. The goal is to participate in the market’s long-term growth while managing risk wisely along the way.

Even defensive investing comes with trade-offs. Playing defense too aggressively—or too early—can lead to false alarms and missed returns. Staying invested longer may bring more growth, but it also means enduring discomfort when markets pull back.

There is no perfect way to avoid every downside while capturing every gain.

Successful investing is not only about knowledge. It is also about behavior.

Investors who tend to do well over time are often those who can remain patient, diversified, disciplined, and emotionally steady in both strong and difficult markets.

That is especially important when headlines are filled with bubble talk. Fear can push investors to sell too soon. Excitement can push them to chase what has already risen. Neither is a wise foundation for financial decision-making.

When markets look overheated, investors do not have to ignore the risks. But they also do not have to be ruled by them.

A wise response begins with a disciplined, diversified, long-term plan. Rebalance periodically. Keep expectations realistic. Understand your own temperament. And avoid making major decisions based on fear, excitement, or the latest market chatter.

Markets can stay hot longer than many people expect, and guessing the exact turning point usually creates more problems than it solves. But a thoughtful strategy can help investors respond with wisdom rather than react emotionally.

For more on this topic, you can read Mark Biller’s article, “How to Handle a Bubble,” at SoundMindInvesting.org. Sound Mind Investing has been helping Christians make biblically informed investing decisions for more than 30 years, offering practical guidance for investors who want to approach the markets with wisdom, discipline, and a long-term perspective.

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