A version of this article first appeared in ″CNBC’s Money 101 newsletter with Sharon Epperson,″ an eight-week series with monthly updates to help improve your financial well-being. Subscribe now to receive the series in your inbox. It is also available in Spanish.
The AI trade has been volatile this week as investors weigh questions about the pace of artificial intelligence development, capacity constraints and safety concerns. Even if you do not own an individual AI stock or AI-themed fund, the swings may still affect your retirement savings.
A “slowdown” in AI innovation, adaptation or use “could have some downstream implications for the companies that might be in the average 401(k) investor’s portfolio,” said John Sedunov, a professor of finance at Villanova University.
The reason: Many 401(k) investors already have meaningful exposure to the companies driving the AI boom.
Five technology giants — Nvidia, Apple, Microsoft, Alphabet and Amazon — account for about 30% of the S&P 500 index, as of Wednesday’s market close, according to Morningstar. For the millions of workers who have a portion of their retirement savings invested in an S&P 500 index fund, that means a relatively small group of mega-cap companies can have an outsized effect on stock returns.
“A slowdown would represent a pullback in some of the AI stocks or the large-cap technology stocks that make up a large portion of investors’ portfolios today,” said Zachary Evens, a manager research analyst for Morningstar, because of the concentration within S&P 500 index funds that can make up a large share of their 401(k).
That doesn’t mean an S&P 500 index fund isn’t diversified. The index owns hundreds of companies across sectors. Still, when a few stocks grow to represent such a large share of the index, experts say, investors should understand the concentration risk that can come with broad-market investing.
AI exposure can extend beyond the biggest tech names
AI exposure is not limited to the household names at the center of a nearly four-year-long U.S. stock market rally. It can also show up in companies that supply chips, power, data centers and other infrastructure for the AI buildout — including industrial and smaller companies.
“The AI infrastructure build has so many different elements on the supply chain that you can be looking at something as far afield as industrials or within the small-cap space, and have AI exposure,” said Marta Norton, chief investment strategist at Empower.
It may also be inside target-date funds, the default investment option in many 401(k) plans. Those funds typically hold a mix of stocks and bonds, and gradually become more conservative as investors approach retirement. Their stock allocations can still include the S&P 500 index and other funds with exposure to AI-linked companies.
“With target-date investors, the asset allocation varies over time, and so as you shift from equity to fixed income, some of that AI exposure will come down naturally,” Norton said. “Still, the lion’s share of that growth exposure is attached in many ways to AI, because it’s a U.S. portfolio and the U.S. market is attached to AI.”
If the AI buildout slows or investors become less enthusiastic about the potential payoff, experts say, retirement savers could see more market volatility. Still, that does not mean a 401(k) is entirely riding on the AI trade.
“Nine times out of 10, all of your money is not at risk with AI,” said Nicolas Abrams, a certified financial planner and CEO of investment advisory firm Opulentia in Hunt Valley, Maryland. “Even if there is some volatility in the AI play, you’ve got a whole portfolio of other investments out there.”
Many diversified 401(k) funds also own other stocks and bonds. The appropriate response to a volatile market is generally not to make a sudden change, Abrams said, but to make sure your holdings and risk level still fit your plan.
Four steps investors can take now
1. Look beyond your fund’s name. A fund described as a broad U.S. stock fund, an S&P 500 index fund or a target-date fund may still have substantial exposure to the largest technology companies. Review the stocks that make up the fund.
“Dig down one layer below the top, and look at the top 10 or top 20 holdings across your ETFs in your portfolio, and try to get an understanding of how correlated those ETFs might be,” Sedunov said.
2. Rebalance if you are overweight. Check whether your exposure to a particular stock, sector or fund has grown beyond your desired asset allocation. If it has, rebalancing can help bring the portfolio back to your intended mix.
“You might be overweight in large-cap stocks right now because of the run-up in the market,” Abrams said. “It might be time to diversify that some and take some of that risk off the table and just rebalance your portfolio to make sure that you’re allocated properly as an investor.”
3. Consider a portfolio-bucketing approach. Experts say investors nearing or in retirement may want near-term spending needs in relatively stable assets, such as cash and bonds, while allowing longer-term growth investments more time to recover from market swings. The right time horizon and mix will differ depending on your retirement goal.
4. Keep your retirement goal in view. Moving to a more conservative portfolio may reduce volatility, Abrams said, but it can also lower expected returns. That may mean saving more, working longer, or adjusting spending expectations to stay on track.
The bottom line: Know what you own and the risks you are taking. Don’t let short-term, AI-driven market volatility dictate a long-term decision about your retirement savings.
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