Why The Rise Of AI Shouldn’t Change The Way You Invest
A lot of young professionals I speak with look at the rise of AI and ask me if they should be tilting their portfolios differently to maximize their gains. In truth, the impact of AI is already reflected in most broadly diversified portfolios. Nobel Prize Winner Eugene Fama states the market is largely efficient and all available information is reflected in the stock prices you see, meaning that there is no need to overweight a portfolio toward a particular sector.
I view the rise of AI as something like the Industrial Revolution in 1760-1840. The industrial revolution made certain processes that were already in place better and it also opened new doors. I want to explore AI and where it currently stands with the largest three stock sectors that comprise the S&P 500: information technology, healthcare, and financials, and why you should not be changing the way you invest because of it.
Information Technology
Information Technology, as we saw in 2023, was able to embrace AI most readily in their everyday practices. Many tech companies discussed AI implementation with shareholders on their earnings calls and since many of these companies are cloud-based, they have been able to implement AI at relatively low cost.
Yes, there are still bugs. I won’t be buying anything from an AI-based robo caller anytime soon and AI-based customer service still leaves a lot to be desired, but many of the innovations have come extremely far in the last few years. With relatively few regulations to hinder progress, the technology sector has been able to adapt extremely quickly.
If you are invested in index funds, a specific sector increasing in overall market share is already being captured, requiring no action from you. At the beginning of 2010, the technology sector only made up around 21% of the S&P 500 according to Syntax Data. By contrast, the technology sector made up 37.5% of the S&P 500 in September 2022.
Healthcare
Some of the AI innovations in the healthcare space have been groundbreaking. Here are some of the use cases:
Assisting in patient diagnosis
Discovering and developing pharmaceuticals
Improving patient communications and monitoring
Assisting in surgeries
Transcription of conversations and medical documents
Many of us know that healthcare workers are overworked and having systems in place to support them could mean very positive things for both the healthcare workers and the patients. The technology, however, must still be monitored and validated by healthcare professionals for the most part.
As with technology, the innovations and added efficiencies in this field work to boost stock prices, which proportionately raise healthcare exposure in a well-diversified portfolio.
Financials
AI has been tested in many areas of the financial sector but like in healthcare, it can only effectively act as an aid to professionals in the space for the time being.
For stock portfolios powered by AI, numerous studies found that AI-powered portfolios consistently underperform their benchmarks. This is possibly due to the adage of “garbage in, garbage out.” If the person incorrectly forecasting what the market will do tells AI to purchase stocks according to the forecast, then it’s all useless analysis.
According to a 2023 study by the CFP Board, 31% of people would be comfortable taking unverified financial advice from AI whereas 52% would be comfortable taking the advice verified with a financial advisor. In the survey, young people were also found to be more wary of using AI for financial advice than older generations, perhaps because young people might understand the limitations of AI better due to more frequent interactions.
Like in the healthcare sector, AI has a place organizing and analyzing data to support the financial professionals. Lower costs and higher productivity among those in financial services can increase stock prices, which boosts sector exposure in a well-diversified portfolio.
Conclusion
The Industrial Revolution brought us the steam engine, an amazing invention to replace the horse and buggy for transportation. As a result, humans could travel faster and farther than ever before. I believe that in many respects, the rise of AI can do a similar thing for humans. It can eliminate mundane tasks like data organizing, testing, and processing, and allow humans the privilege of higher-level thinking. Since these innovations impact industries across the board, the rise of AI should not cause investors to tilt their portfolios disproportionately toward any industry and investors should maintain broad portfolio diversification.
This article was originally published by me on Forbes.
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Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6212781.1 (1/24)(Exp. 1/26)
