IN AN INTERVIEW a little while back, the technology investor Peter Thiel drew an uncomfortable comparison. Today’s frenzy around artificial intelligence, he said, parallels the tech stock bubble of the 1990s. To illustrate his point, Thiel pointed to Amazon. By any measure, it’s been an extraordinary success. But, Thiel points out, it hasn’t been a straight line. At one point early on, Amazon shares lost more than 90% of their value. “My suspicion is that that’s roughly where we are in AI. It’s correct as a technology, but extremely bubbly and crazed…” Thiel explained that he doesn’t doubt the importance of artificial intelligence as a technology. What he’s questioning is how these technologies are being financed. Of particular concern are financing deals in the AI ecosystem that are seemingly circular. Nvidia, for example, has invested as much as $100 billion into ChatGPT maker OpenAI, at the same time that OpenAI has committed to spending billions on Nvidia’s chips. Similarly, OpenAI signed an agreement with AMD, another chip maker, to buy tens of billions of dollars of its chips while also buying a stake in the company. Transactions like this call into question whether these companies can continue to generate earnings at the same rapid pace. Compounding this concern, market valuations are elevated. On a price-to-earnings (P/E) basis, the S&P 500 is trading at 21 times estimated earnings. That’s quite a bit above the long-term average of 16 and thus represents a risk. If investors cool on AI, both earnings estimates and P/E multiples would likely drop at the same time, causing share prices to take two steps down.  How unusual is this situation, and how concerned should we be about it? It turns out these are questions economists have been studying—and struggling with—for years. Probably the most well known research on the topic dates to the 1970s, when economist Hyman Minsky developed what he called the Financial Instability Hypothesis.  This is how Minsky described it: “A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.” Booms and busts, in other words, are inevitable. Why? Paradoxically, Minsky said, financial stability causes financial instability. That’s because periods of financial stability lead people to become overconfident and to assume that the good times will last forever. But that overconfidence leads to complacence and to a lack of financial discipline, especially among lenders. That then causes debt levels to rise. What happens next? Writing in Manias, Panics and Crashes, Charles Kindleberger explains that there’s typically a canary in the coal mine that causes investor sentiment to shift. Often, it’s the unexpected failure of a bank or other institution. That’s why it caught people’s attention in February when Blue Owl Capital, which operates private credit funds and has helped finance AI data centers, announced that it was halting redemptions from one of its funds. Looking at more recent research, economist Bill Janeway agrees with Minsky on the causes of bubbles but argues that they’re not all bad. He talks about “productive bubbles.” As an example, he points to the market bubbles surrounding the development of the British railway system in the 1830s and 1840s. Much like the 1990s tech bubble in the United States, investors piled into railway stocks, causing prices to spike to irrational levels. Overbuilding ensued, and that led to a number of bankruptcies. Despite the financial losses, Janeway believes the railway bubble was productive. That’s for the simple reason that, at the end of the day, the tracks were laid. Yes, there were excesses, but Janeway sees no alternative. Investor enthusiasm acts as a sort of subsidy for early-stage, uncertain technologies that the market wouldn’t otherwise finance. The evidence certainly supports Janeway’s argument. The market does a very poor job picking winners. Janeway notes that essentially the same thing happened in the 1920s, when investors piled into companies working to build out the electricity grid in the U.S. There was massive over-investment, which led to bankruptcies. But in the end, electrification projects were completed much more quickly than they might have been otherwise. The key lesson: When market bubbles roll around, we shouldn’t be surprised. They’re inevitable. And over the long term, they’re arguably a good thing, enabling technology to move forward. Nevertheless, when bubbles burst, it’s unnerving. And indeed, in Janeway’s view, the same thing will likely happen with AI stocks. If Janeway is right, how can you prepare? The solution, in my view, is straightforward: Instead of trying to guess when the AI—or any other—bubble might burst, investors should take the view that the market could drop at any time. Then structure your portfolio accordingly.  There’s more than one way to approach this, but in my view, it’s a simple two-step process: First, make sure you’re diversified at the asset class level, with enough stowed in short-term bonds or cash to carry you through a multi-year market downturn. Then go one level deeper, auditing your stock holdings for individual stocks or funds overly exposed to any one corner of the market. And if you’re in a private fund—especially a private credit fund—I’d identify the nearest exit.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

HAVE YOU GIVEN any thought to what's about to happen to your S&P 500 tracker? Three enormous IPOs are expected later this year: SpaceX, OpenAI, and Anthropic. Based on their most recent private transactions, SpaceX appears to be valued at around $1.25 trillion, OpenAI at roughly $800 billion, and Anthropic at approximately $380 billion. Combined, we could be looking at close to $3 trillion in private market value that wants to go public. To put that in perspective, the entire S&P 500 is worth roughly $60 trillion. That's not a routine year for markets. That could be a very large event indeed. I suspect the vast majority of people with money sitting in a tracker fund have absolutely no idea it's coming. Those that do might have read some of the more sensational claims I've seen about immediate, disruptive wholesale change to the S&P 500. I think those articles are getting ahead of themselves. These companies might not automatically land in your S&P 500 tracker the day they list. The index has hard rules, and two of them seem particularly relevant. A company generally needs to have been profitable for four consecutive quarters before it qualifies. OpenAI and Anthropic are both, as far as we can tell, burning through enormous amounts of capital. They may well not meet that bar at IPO. There's also a float requirement, where roughly half of a company's outstanding shares typically need to be publicly tradeable. These businesses will almost certainly debut with tiny floats, possibly somewhere between 5% and 10% of shares in public hands. That could disqualify them from day one. SpaceX is possibly the closest to profitability of the three, but the float issue likely applies across the board. One area of uncertainty is the selection committee. This has some discretion around the inclusion of larger IPOs. They could choose to move faster than the rules imply. So the story might not be your tracker being immediately and dramatically restructured. The story could be more drawn out than that, and perhaps more interesting for it. What does this mean in the short term? I can only offer informed speculation. To my mind, volatility seems likely around the listings themselves. Not necessarily because of forced index rebalancing, but because the float issue creates its own kind of pressure. Enormous companies carrying enormous implied valuations, but only a sliver of shares in circulation. Limited supply, near-unlimited institutional demand, and a market full of retail investors who've been reading about these companies for years and finally get their shot. I would guess we should expect wild price swings during those early trading days, though I could be wrong about the scale of it. Rotation risk is worth watching too, I think. Investors might pull money out of existing AI bets, the likes of Nvidia and Microsoft, and move it directly into OpenAI and Anthropic the moment they're publicly available. If that happens, the stocks that have driven your tracker's returns for the last three years could face sustained selling pressure, not because anything's wrong with those businesses, but simply because a shinier, newer version of the same trade has just arrived. A throwaway thought for anyone holding individual shares rather than trackers. The companies most at risk of ejection are those sitting at the bottom of the index. When a business loses its S&P 500 membership, every passive fund becomes an automatic seller. That can hit the share price hard, nothing wrong with the company, just forced selling as a side effect of something big happening at the very top. Worth knowing if any of those smaller names are in your portfolio. Medium term it could get more interesting still. If and when these companies do meet the profitability and float requirements, which could, I think, be years after their IPOs rather than months, every S&P 500 tracker on the planet becomes an automatic buyer. Hundreds of billions flowing into SpaceX, OpenAI and Anthropic whether fund managers want it or not. The mechanics of passive investing would turn every tracker holder into an investor in these three companies with absolutely no say in the matter. That's the bit people rarely stop to think about. Passive investing isn't neutral. It just means someone else is making your decisions for you. Then I come to the big question: do these businesses actually deserve these valuations? It's worth noting that every major IPO of recent years has tended to trade down from its private valuation once the public gets a proper look at the books. The venture capital guys who set those private prices aren't always right, and public markets have a habit of finding that out fairly quickly. If the same happens here, your tracker should hopefully be buying them at a fair price by the time they filter into the realm of inclusion within that tracker. It has to be said, that's not guaranteed. I'm not trying to be alarmist. These aren't penny stocks being hyped and I think that matters. OpenAI's revenue had already surpassed $20 billion by the end of 2025. SpaceX is targeting what could be the largest public offering in history. Anthropic has BlackRock, Blackstone, Microsoft and Nvidia on its books. These are real businesses generating real money with the biggest and most sophisticated names in global finance and technology behind them. That doesn't make them cheap at these prices, but it does make them a very different proposition from the usual IPO hype cycle. The bottom line for the average investor? We probably don't need to do anything dramatic. But it doesn't hurt to understand that the passive, set-and-forget vehicle you own may look quite different over the next few years, not necessarily in a single sudden lurch, but gradually, as these companies either earn their way into the index or don't. The index you bought into always changes but the next few years will definitely see bigger changes than normal. If nothing else, it'll be interesting to see what happens going forward…Eyes open.

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Mark Crothers is a retired small business owner from the UK with a keen interest in personal finance and simple living. Married to his high school sweetheart, with daughters and grandchildren, he knows the importance of building a secure financial future. With an aversion to social media, he prefers to spend his time on his main passions: reading, scratch cooking, racket sports, and hiking.

A POPULAR JOKE about retirement is that it can be hard work. That’s because financial planning is like a jigsaw puzzle, and retirement often means rearranging the pieces. In the past, I’ve discussed two key pieces of that puzzle: how to determine a sustainable portfolio withdrawal rate and how to decide on an effective asset allocation. But there’s one more piece of the puzzle to contend with: taxes. Especially if you’re planning to retire on the earlier side, it’s important to have a tax plan. When it comes to tax planning for retirement, there’s one key principle I see as most important, and that’s the idea that in retirement, the goal is to minimize your total lifetime tax bill. That’s important because a fundamental shift occurs the day that retirement arrives: In contrast to our working years, when taxes are, to a large degree, out of our control, in retirement, taxes are much more within our control. By choosing which investments to sell and which accounts to withdraw from, retirees have the ability to dial their income—and thus their tax rate—up or down in any given year. The challenge, though, is that tax planning can be like the game Whac-A-Mole. Choose a low-tax strategy in one year, and that might cause taxes to run higher in a future year. That’s why—dull as the topic might seem—careful tax planning is important. To get started, I recommend this three-part formula: Step 1 The first step is to arrange your assets for tax-efficiency. This is often referred to as “asset location.” Here’s an example: Suppose you’ve decided on an asset allocation of 60% stocks and 40% bonds. That might be a sensible mix, but that doesn't mean every one of your accounts needs to be invested according to that same 60/40 mix. Instead, to help manage the growth of your pre-tax accounts, and thus the size of future required minimum distributions, pre-tax accounts should be invested as conservatively as possible. On the other hand, if you have Roth assets, you’d want those invested as aggressively as possible. Your taxable assets might carry an allocation that’s somewhere in between. If you can make this change without incurring a tax bill, it’s something I’d do even before you enter retirement. Step 2 How can you avoid the Whac-A-Mole problem referenced above? If you’re approaching retirement, a key goal is to target a specific tax bracket. Then structure things so your taxable income falls into that same bracket more or less every year. By smoothing out your income in this way from year to year, the goal is to avoid ever falling into a very high tax bracket. To determine what tax rate to target, I suggest this process: Look ahead to a year in your late-70s, when your income will include both Social Security and required minimum distributions from your pre-tax retirement accounts. Estimate what your income might be in that future year and see what marginal tax bracket that income would translate to. In doing this exercise, don’t forget other potential income sources. That might include part-time work, a pension, an annuity or a rental property. And if you have significant taxable investment accounts, be sure to include interest from bonds. Then, for simplicity, subtract the standard deduction to estimate your future taxable income. Suppose that totaled up to $175,000. Using this year’s tax brackets, that would put your income in either the 24% marginal bracket (for single taxpayers) or 22% (married filing jointly). You would then use this as your target tax bracket. Step 3 With your target tax bracket in hand, the next step would be to make an income plan for each year. The idea here is to identify which accounts you’ll withdraw from to meet your household spending needs while also adhering to your target tax bracket. This isn’t something you’d map out more than one year in advance. Instead, it’s an exercise you’d repeat at the beginning of each year, using that year’s numbers. What might this look like in practice? Suppose you’re age 65, retired and not yet collecting Social Security. In this case, your income—and thus your tax bracket—might be quite low. To get started, you’d want to withdraw enough from your tax-deferred accounts to meet your spending needs but without exceeding your target tax bracket. This would then bring you to a decision. If you’ve taken enough out of your tax-deferred accounts to meet your spending needs and still haven’t hit your target tax rate, then the next step would be to distribute an additional amount from your pre-tax accounts. But with this additional amount, you’d complete a Roth conversion, moving those dollars into a Roth IRA to grow tax-free from that point forward. How much should you convert? The answer here involves a little bit of judgment but is mostly straightforward: You’d convert just enough to bring your marginal tax bracket up into the target range. Some people prefer to go all the way to the top of their target bracket, while others prefer to back off a bit. The most important thing is just to get into the right neighborhood. What if, on the other hand, you’ve taken enough from your pre-tax accounts to reach your target tax rate, but that still isn’t enough to meet your spending needs? In that case, you wouldn’t take any more from your pre-tax accounts, and you wouldn’t complete any Roth conversions. Instead, you’d turn to your taxable accounts, where the applicable tax brackets will almost certainly be lower. Capital gains brackets currently top out at just 20%. Thus, for the remainder of your spending needs, the most tax-efficient source of funds will be your taxable account. What if you aren’t yet age 59½? Would that upend a plan like this? A common misconception is that withdrawals from pre-tax accounts entail a punitive 10% penalty. While that’s true, it isn’t always true, and there’s more than one way around it. One exception allows withdrawals from a workplace retirement plan like a 401(k) as long as you leave that employer at age 55 or later. In that case, as long as you don’t roll over the account to an IRA, you’d be free to take withdrawals without penalty. If you’re retiring before age 55, you’ll want to learn about Rule 72(t). This allows for withdrawals from pre-tax accounts at any age, as long as you agree to what the IRS refers to as substantially equal periodic payments (SEPP) from your pre-tax assets. The SEPP approach definitely carries restrictions, but if you’re pursuing early retirement, and the bulk of your assets are in pre-tax accounts, this might be just the right solution.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.