How to Prepare Your Portfolio for an Uncertain Future
Editor's note: Last January, the release of a new, efficient AI model was enough to send AI stocks tumbling. Today, the future of AI is uncertain. Folks are still worried about an AI bubble... and we could still be just one big announcement away from another downward spiral.
In today's Weekend Edition, we're taking a break from our usual fare to share this issue, adapted from the February 2025 edition of The Total Portfolio. In it, Dr. David "Doc" Eifrig explains the one important step you can take to prepare your portfolio for whatever's next.
Sometimes, the market gives you the exact lesson you need.
In January 2025, a Chinese artificial-intelligence ("AI") firm released a new large language model ("LLM") called DeepSeek R1 that shredded U.S. AI stocks.
This wasn't just front-page financial news. It was the kind of story that spread everywhere...
An offshoot of a Chinese quant-trading hedge fund, DeepSeek aims to create a level of AI that matches human intelligence more closely than any other. And despite its much smaller budget compared with its U.S. competitors (like OpenAI), it made impressive strides with the release of its hyperefficient AI model.
The markets interpreted the new arrival as a major threat to U.S.-based firms...
Stocks connected to AI, like Broadcom (AVGO) and Microsoft (MSFT), tumbled. AI darling Nvidia (NVDA) fell 17% in one day.
The broader market soon recovered most of its losses. Still, at the time, even people who didn't follow markets at all were asking me what happened to AI stocks. That's when you know a story is big.
As we'll explain today, we can't know exactly where the AI trend will go from here. But we can make sure our portfolios are ready for whatever comes next...
There's a phrase in the financial markets that describes expensive stocks as "priced for perfection." It means anything that reduces investors' expectations of the rosiest future imaginable can call a stock's current valuation into question.
That's what happened last January. Fear that smaller models could reduce demand for AI infrastructure sent tech giants tumbling. And since so many investors owned those major players – even if just through index funds – the decline woke them all up at once to the risk in their portfolios.
It makes sense that folks feared DeepSeek would be the pin that would pop the bubble.
Today, markets are once again rallying to new highs. Valuations are on the upper end of historical norms. The market is getting exuberant. Once again, investors are worried that we're working on borrowed time.
But if anything, DeepSeek's success last year makes us optimistic that AI advances will continue – perhaps more quickly and cost-efficiently than ever before.
Our point is, there's no clear winner (or loser) yet.
The AI industry is still being established. We don't know exactly what the top products will be, who will develop them, or where the profits will accrue.
What we do know is that AI will be big, and you should be invested – albeit carefully, and in the right proportions.
The Only Way to Capture Gains While Minimizing Risk
Not even experts in technology and finance can predict what's next for AI...
Technologists seem to know more about AI than anyone else. Those working with it are extremely excited. They believe it's going to change the world. And it probably will. But that kind of frenzied anticipation is what breeds bubbles.
They thought the same thing about the Internet in 1999. They were right, of course... eventually. The Internet went on to revolutionize our lives – although not until after the dot-com bubble burst... and many Internet companies went bust. Even the stocks that survived drew down 90%.
Excitement about a particular technology does not always lead to investment returns.
As for financial experts... they get caught up in bubbles and manias just like anyone else. Plenty of pros lost gobs of money in the dot-com bubble, the 2008 financial crisis, and every other crash.
Volatile markets exist precisely because financial decision-makers follow the crowd. They forecast, predict, and extrapolate. They study stocks and put hard-earned capital at risk all in the belief that they've got a company figured out.
As they get more confident, they place bigger and bigger bets. But then, one small event (like the release of DeepSeek's AI model) crashes their portfolio.
I've seen it a thousand times.
And the lesson is always the same: No matter how much studying you do, no matter what experts you follow, no matter how hard you try to figure out the next step... you can always expect the unexpected.
So if your strategy depends on predicting the future... find a new strategy.
Investing in AI offers great opportunity, but only if you admit that you can't know precisely what will happen... and only if you commit to caution.
The safest way to capture long-term gains in AI without risking your wealth is to incorporate it into a carefully curated portfolio.
What Builds Wealth
We all know the big ideas about portfolios: Diversify. Minimize your risk. Don't trade too much. Hold for the long term.
But constructing a strong portfolio is more complex than just those surface-level rules...
It's all about balance. How much do you diversify? What level of risk should you take?
Or a big one... how do you weigh the benefits of a long-term strategy against the opportunities that present themselves for quick gains right now?
Answering these questions and learning how to craft a portfolio that reliably builds wealth takes time and study. Even then, it's incredibly difficult to succeed alone.
When boiled down to its simplest form, here's our core strategy...
- Find businesses that compound their wealth over time by creating value.
- Make a case for why their strong free cash flows ("FCF") are defendable from competition and likely to keep growing.
- Then buy a bunch of those businesses in industries with the greatest runway for growth.
In other words, we select only the cream of the crop across the entire investment universe. We make sure we can keep building wealth, no matter what popular trends reverse or what surprises come along.
It's this base of strong, diverse businesses that insulates us from stock market volatility. That's how you can keep profiting from some of the biggest stories in the market... without putting your wealth at risk.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Doc just joined four of Stansberry Research's other senior experts for our most important event of the year... They're recommending a strategy that has already returned a total of 185% since 2017, with less risk than stocks. It's the perfect way to set your money up for success this year, without guesswork or crazy speculation. And it's unique to our business – you won't find it anywhere on Wall Street.