Amidst complex market dynamics, investors are embracing AI for a competitive advantage in finance. In Australia, AI-driven financial planning is gaining popularity. Yet, as we explore AI advisors and fund managers, it’s vital to weigh their pros and cons against human expertise in investment decisions.
The Rise of AI Investors in Australia
Australia, known for its robust financial sector and tech-savvy population, is no stranger to embracing AI in various industries. In recent years, AI has found its way into the realm of investment and financial planning, and AI investors are becoming increasingly prevalent. The allure of AI-driven investment decisions lies in the promise of better returns, reduced risk, and enhanced financial security.
A Finder study wherein ten of Australia’s biggest managed funds listed in the ASX were pitted against portfolios assembled by AI tools ChatGPT and Gemini (previously Bard) from May to September 2023. Those tools were guided to use the managed funds’ investment strategies in running their own portfolios.
When the results were tallied, the Gemini stocks – mostly from US tech companies – gained 6.21 per cent on average; during the last weeks of July, its portfolio even gained almost 11 per cent before settling in at past eight per cent in September. ChatGPT’s portfolio of 23 stocks from the US, Asia, the UK, and Australia, gained barely six per cent in July before it went down to slightly above four per cent in September.
The listed funds fared a bit better, with their stocks swinging in value against ChatGPT’s portfolio for most of May and June, before finally breaking away in late July and eventually starting September with gains of above six per cent.
AI as Investment Advisory Tools
Some investment experts may advocate for AI constructs as an investment advisory tool but if you are on the fence, let’s weigh the advantages and disadvantages.
Advantages
Data Analysis at Scale
One of the standout advantages of AI is its ability to analyse vast amounts of financial data swiftly and accurately. AI systems can process historical market data, news, and even social media sentiment to identify trends and patterns that might escape human analysis. This can enable AI investors to make data-driven decisions with unparalleled efficiency.
Emotion-Free Decision-Making
Human investors are prone to emotional biases that can lead to impulsive decisions. AI, on the other hand, lacks emotions, ensuring a rational approach to investment. It doesn’t get swayed by fear, greed, or sentiment, which can be a significant advantage in volatile markets.
24/7 Monitoring
AI-driven systems can monitor markets around the clock. This constant vigilance allows for swift responses to changing market conditions and the immediate execution of predetermined strategies, a task that would be exhausting for human fund managers.
Custom Portfolios
AI tools can create personalised investment portfolios based on individual financial goals and risk tolerance. This level of customisation can be challenging for human advisors to replicate consistently.
A Finder UK test over March and April 2023 may have even proved its viability to pick good stocks for a portfolio. The team studied the performance of ten UK investment funds on the Interactive Investor trading platform as a baseline to task ChatGPT with choosing stocks on criteria such as a company with minimal debts and good growth. That portfolio selected 23 stocks, including those of Microsoft, VOD giant Netflix, and grocery chain Walmart.
Disadvantages
Lack of Human Judgment
While AI can process data and identify patterns, it cannot exercise human judgement or factor in qualitative aspects that might affect investment decisions. It often overlooks the broader economic and geopolitical context, leading to potentially flawed recommendations.
Over-Reliance on Historical Data
AI models are trained on historical data, which may not always reflect future market dynamics. Sudden unforeseen events, such as geopolitical crises or natural disasters, can disrupt markets, rendering historical data less relevant.
Black Box Problem
People with very minimal tech backgrounds might be lost trying to make sense of AI algorithms. Investors may not fully understand either the rationale behind AI-driven recommendations, which can lead to a lack of trust in the system.
Market Manipulation
AI algorithms can be vulnerable to manipulation by malicious actors who aim to exploit their weaknesses. This introduces new risks to the investment landscape.
AI systems may even be used to create false promotions of a new investment scheme. In November 2023, the AAP debunked a video showing Federal Treasurer Jim Chalmers, 9News anchor Peter Overton, and former RBA governor Philip Lowe promoting the scheme, which supposedly generates $30k every month for a simple startup fee of $250. Further details of the scheme were supposedly found on 9News, but clicking the attached link redirects to a suspicious site instead of Nine. The clips of all three personalities in the scheme’s promotional video turned out to be stock footage from other events.
Striking a Balance: The Hybrid Approach
The most prudent approach to investment decisions may be a hybrid one, combining the strengths of AI-driven analysis with human judgement. In this model, AI serves as a powerful tool for data analysis and trend identification, while human advisors provide the emotional intelligence, ethical considerations, and broader context necessary for well-rounded investment decisions.
An AI-human partnership in the investment area can enjoy the best of both worlds: the speed, precision, and emotion-free analysis offered by machines, coupled with the nuanced judgement and adaptability of humans. This approach allows investors to harness the full potential of AI while mitigating its limitations.
Conclusion
As AI continues to shape the landscape of investment in Australia and around the world, it is essential to recognise its potential as well as its limitations. AI investors offer distinct advantages in terms of data analysis, emotion-free decision-making, and 24/7 monitoring. However, they cannot replace the human factor in investing, which encompasses judgement, adaptability, ethical considerations, and emotional connection.
The future of investment may lie in finding the right balance between AI and human expertise. By leveraging the strengths of both, investors can make informed decisions that maximise returns while preserving financial security and peace of mind.
DISCLAIMER: This article is for informational purposes only and does not constitute official financial advice. 2 Ezi has no relationships with any financial advisor and does not endorse any AI tools.
