A quarter of a century ago, on 10 March 2000, the dot-com bubble was fit to burst.
The Nasdaq index peaked at 5,048.62 points, more than double its value a year earlier and a 24 per cent increase since the dawn of the new millennium. The index grew 86 per cent over 1999.
When the bubble burst, the Nasdaq lost more than 75 per cent of its gain on the back of profit taking and plummeting investor sentiment.
A cautionary tale for the dangers of the hype train.
Brad Holland, director of investment strategy at Nutmeg, said: 'Looking back, the market excitement and "get in early" mentality, which led to the creation of the bubble, was heavily influenced by hype around companies that had yet to deliver significant shareholder value and impact.'
Sound familiar? Fast forward to 2025, the Nasdaq Composite has risen more than 120 per cent over the past five years. Even the more rounded S&P 500 has gained 109 per cent since March 2020.
These gains are largely as a result of the success of the 'Magnificent Seven' companies that have capitalised on the AI boom of recent years.
The value of these companies is such that they account for as much as 35.4 per cent of the S&P 500's market capitalisation, almost triple what they were ten years ago.
However, they are by no means immune from the whims of the market.
In January, the launch of China's Deepseek AI - developed supposed for just $6million compared to the many hundreds of millions required for the development of Western large language models - proved just how fragile the foundations of the Magnificent Seven are.
Nvidia, the world's second largest company, which is worth more than the GDP of most countries, saw some $600billion fall off its market value overnight.
Is an AI bubble similar to the dot-com one brewing?
In spite of certain similarities with the situation seen in 2000, the market is undoubtedly a different place.
While grappling with huge valuations, the top tech stocks are profit generating and have their futures mapped out.
Darius McDermott, managing director of FundCalibre, said: 'When the dot-com bubble burst, the blame fell on excessive valuations driven by exuberant investors.
'Many internet companies boasted sky-high valuations but lacked cash flow and sustainable business models, and the public simply wasn't ready for what they were selling.'
This is no longer the case; the global tech players of today are considerably more established than those growing in the dot-com bubble.
'These tech giants are deeply embedded in everyday life - 'Googling' is second nature. These firms are also much more highly cash-generative with superior returns on equity,' McDermott said.
Holland added: 'This was a tough period for some investors but, for resilient companies able to weather the storm and adapt, it made them stronger and focused their leaders on creating sustainable business models.'
Is AI really the future?
The rapid change seen in recent years as a result of AI is showing no signs of abating.
Dom Rizzo, portfolio manager of the T. Rowe Price Global Technology Equity strategy, said: 'AI has the potential to be the most significant productivity enhancer since electricity, offering deflationary benefits by reducing costs and boosting efficiency across industries.
'However, as with any technological revolution, there is a risk of speculative excess.'
However, Rizzo says market enthusiasm is 'underpinned by tangible earnings growth and real demand for AI applications, which sets it apart from the dot-com era.'
Back in the dot-com days, large valuations were often driven by speculation rather than visible returns.
He added: 'Currently, we do not observe AI valuations reaching the extreme levels seen during the dot-com bubble, but vigilance is necessary.
'The market's healthy scepticism towards AI-related valuations today contrasts with the unchecked exuberance of the late 1990s.'
Indeed, McDermott argues that valuations, while still high, are reasonable.
He said: 'Nvidia trades at 25x forward earnings - modest compared with the 60x-plus multiples of the late 1990s. While volatility is inevitable - we are experiencing a bout of it now - AI's long-term disruptive power is undeniable.'
Don't be a sheep
The main takeaway, McDermott says, is to 'avoid investing with the herd'.
It can be tempting to throw your weight behind the big tech stocks, after all, their returns have delivered thus far. But doing so leaves too many investors lacking diversification.
However, it is important to avoid over-allocating your funds towards a small number of equities.
McDermott said: 'Don't put all your eggs in one basket. While the US remains a global leader in AI innovation, equity returns may moderate over the next five years.
'Moreover, some index funds that have soared due to Magnificent Seven returns now look vulnerable.
'Opportunities may lie in overlooked growth plays, value stocks, and smaller-cap equities.
'A well-balanced allocation - spanning US and international stocks, bonds, and alternatives - can help mitigate risk and stabilise performance.'
McDermott tips Rathbone Global Opportunities fund (ongoing charge 0.51 per cent) and T. Rowe Price US Smaller Companies Equity fund (ongoing charge 0.95 per cent), which he says offer differentiated exposure to the US.
Holland added: 'Taking a broader thematic approach when looking at a growth area as big as technology can help manage the risk of concentrating investments in individual companies while benefiting from passive investing.'
Compare the best DIY investing platforms and stocks & shares Isas
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it's important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare the best investment accounts, we've crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money's full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
| Admin charge | Charges notes | Fund dealing | Standard share, trust, ETF dealing | Regular investing | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell* | 0.25% | Max £3.50 per month for shares, trusts, ETFs. | £1.50 | £5 | £1.50 | £1.50 per deal | More details |
| Bestinvest* | 0.40% (0.2% for ready made portfolios) | Account fee cut to 0.2% for ready made investments | Free | £4.95 | Free for funds | Free for income funds | More details |
| Charles Stanley Direct* | 0.35% | No platform fee on shares if a trade in that month and annual max of £240 | Free | £11.50 | n/a | n/a | More details |
| Etoro* No investment funds or Sipp | Free | Stocks, investment trusts and ETFs. | Not available | Free | n/a | n/a | More details |
| Fidelity* | 0.35% on funds | £7.50 per month up to £25,000 or 0.35% with regular savings plan. | Free | £7.50 | Free funds £1.50 shares, trusts ETFs | £1.50 | More details |
| Freetrade* No investment funds | Basic account free, Standard with Isa £5.99, Plus £11.99 | Stocks, investment trusts and ETFs. | No funds | Free | n/a | n/a | More details |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for shares, trusts, ETFs | Free | £11.95 | Free | Free | More details |
| Interactive Investor* | £4.99 per month under £50k, £11.99 above, £10 extra for Sipp | Free trade worth £3.99 per month (does not apply to £4.99 plan) | £3.99 | £3.99 | Free | £0.99 | More details |
| iWeb | Free | £5 | £5 | n/a | 2%, max £5 | More details | |
| Trading 212* | Free | Stocks, investment trusts and ETFs. | Not available | Free | n/a | Free | More details |
| Vanguard Only Vanguard's own products | 0.15% | Only Vanguard funds | Free | Free only Vanguard ETFs | Free | n/a | More details |
| (Source: ThisisMoney.co.uk Jan 2025. Admin % charge may be levied monthly or quarterly | |||||||
