I have been writing about Artificial Intelligence (AI) for at least a year now. I am convinced it is going to make the kind of impact on our lives that the internet or cell phones did.

It was in May 2023 that I wrote that I thought that AI would be the next technological singularity in How Artificial Intelligence Will Affect Your Investments.

Since that May article, shares of Nvidia (NSDA: NVDA), one of the key beneficiaries of the AI boom, are up nearly 200%. Some smaller cap AI companies have seen even more impressive gains.

Bear with me, because there is a lesson here. If you watch the financial news at all, you probably know that AI stocks are soaring. The entire sector is soaring in exactly the same way the dot-coms did back in 1999-2001.

Do you remember what happened then? A lot of people got rich quickly, and then they got poor quickly. The stories are legendary. Housewives, bellboys, and waiters were all sharing their tips on the best internet stocks. In many cases, people were investing in companies in which they did not understand the business model.

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Of course, the internet is bigger than ever. Companies like Microsoft (NSDQ: MSFT) and Intel (NSDQ: INTC) are still here. But many small companies that capitalized on this bubble went bankrupt when the bubble popped.

People make fortunes during booms, but they also lose fortunes. You can lose a fortune during a boom in a couple of different ways. One is that a boom can be accompanied by significant volatility. On the way to huge gains can be significant corrections. If you panic sell during a correction, you can consistently lock in losses, even as the market records long-term gains.

A second way to lose is to invest in overly speculative companies that are simply capitalizing on the boom, without actually delivering much of value. There were many companies like this during the dot-com boom. When the bubble popped, these companies went bankrupt, and investors were left with nothing.

Remember, AI fortunes are being made right now, but there are also fortunes being made in Las Vegas. It’s just that these aren’t high-probability fortunes. Thus, my advice is to maintain discipline. Don’t go chasing bubbles.

It’s OK to set aside some money for speculative investments, but don’t invest more than you can afford to lose. And don’t make that the core of your investment strategy.

I have friends that I have known for years who have chased bubbles, and they never seem to get ahead. Yes, you can make money on the way up, but you just never know when to get out.

You have a far higher probability — in fact I would say it’s practically certain — of becoming wealthy by boosting your returns a few percentage points and letting time and compounding do the work for you. Manage your risk by keeping position sizes small and your portfolio diverse, and your wealth will grow over time.

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