Downsides of Investing using AI

Downsides of Investing using AI

If you want to invest as an expat or high-net-worth individual, which is what i specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

Introduction

Recently, I came across various online resources, influencers, and content creators.

All of them were primarily focusing on how they could use artificial intelligence tools like ChatGPT to invest.

I also saw that most Americans now seek suggestions from ChatGPT regarding investment advice.

Today, I want to discuss AI’s limitations and the drawbacks of following its investment advice.

I don’t want to be skeptical about the limitations of AI because it is innovative and proves to be better than expected.

However, there are some drawbacks as there are some advantages to the AI limitations.

Without delay, let us get to the details regarding why AI isn’t good for investment advice.

ChatGPT in the U.S.

ChatGPT, the conversational AI created by OpenAI, has taken on a new role as a stock market advisor in American society.

It was found that 47% of US adults have used ChatGPT to seek advice on stock market picks.

This was according to the survey conducted by The Motley Fool, an investment advice website.

Furthermore, 45% of respondents stated they would be comfortable relying solely on the AI model for stock picking.

It’s important to note that ChatGPT-3.5 was trained on internet content up to 2021.

Users would need ChatGPT Plus, powered by GPT-4 to access more up-to-date market insights.

However, even with ChatGPT Plus, there are limitations, as it does not provide real-time information such as stock price fluctuations.

Therefore, ChatGPT may not be suitable for those considering day trading.

The survey also highlighted generational differences in AI adoption for investing advice.

Younger Americans, particularly Millennials (50%) and Gen Z (53%), embraced AI for investment guidance, using ChatGPT for stock picks.

In contrast, only 25% of Baby Boomers, who are less accustomed to digital technologies, felt comfortable doing the same.

Income levels played a role in AI adoption, with 77% of high-income Americans reporting they had used ChatGPT.

This is in comparison to 43% of middle-income Americans and only 23% of low-income Americans.

Gender differences were also observed, with men (55%) more likely to use ChatGPT for investing advice than women (41%).

Women tend to exhibit more conservative financial behavior and greater resistance to impulsive decisions during market volatility.

Overall, 69% of American adults expressed openness to using ChatGPT for investment advice in the future.

This indicates a potentially significant shift in the economics of money management and democratizing access to investment tools.

Additionally, a hypothetical portfolio of stocks selected by ChatGPT, based on specific criteria, outperformed popular funds in the UK.

This suggests that AI-driven approaches may challenge traditional fund management.

Researchers tested ChatGPT’s ability to perform sentiment analysis using headlines to inform stock-picking strategies in a separate study.

The results indicated that ChatGPT, even with data up to September 2021, outperformed the S&P 500 ETF, potentially disrupting the finance industry further.

Now, let us come to the actual details regarding why someone shouldn’t rely on AI for investment advice.

But first, let us dive into some important information based on the information provided above.

Should You Rely On ChatGPT?

While ChatGPT may appear versatile, it’s important to clarify that it is not qualified to make stock recommendations – a fact it acknowledges.

When asked about stock picks, ChatGPT provides the following response:

“As an AI language model, I cannot provide specific investment advice or recommend specific stocks to buy. Investing in stocks involves significant risks and requires careful consideration of your financial goals, risk tolerance, and investment timeframe”.

Conducting research and analysis before making investment decisions is always prudent.

You may consider consulting a financial advisor or utilizing online tools to assess your investment objectives and risk tolerance.

Furthermore, diversifying your investment portfolio across various asset classes and sectors can help mitigate risk and potentially enhance returns.

Remember that past performance does not indicate future results, so thorough research and analysis should guide any investment decision.

These kinds of aspects may not be achieved with the help of AI tools such as ChatGPT.

While ChatGPT’s response may not fulfill expectations for stock recommendations, it offers valuable insights.

Firstly, it emphasizes the importance of aligning your portfolio with your financial goals, time horizon, and risk tolerance.

Nonetheless, they are considered the fundamental principles any financial advisor would advocate.

Additionally, it encourages independent research and analysis of stock picks, potentially involving a financial advisor.

Lastly, ChatGPT recommends diversifying your portfolio – a common financial recommendation.

ChatGPT excels at specific tasks, like accessing information relevant to your queries.

However, it lacks the capability to make sophisticated investment choices.

You could likely obtain similar information through Google search, but ChatGPT neatly consolidates key points into an easily digestible format.

Exploring AI to Enhance Your Portfolios

If you’re interested in leveraging artificial intelligence for portfolio management, consider using a robo-advisor.

These platforms offer portfolios and exchange-traded funds crafted by human portfolio advisors.

However, the allocation of your self-declared investment goals and risk tolerance to an apt diversified portfolio is executed by the robo-advisor’s algorithm.

Some robo-advisors even waive annual management fees, offering investment guidance for a cost the same as using ChatGPT.

Wait, there are some drawbacks of opting for robo-advisors as well, which are as follows.

Drawbacks of Robo-Advisors

— Limited Personalization

Robo-advisors offer flexibility in setting and adjusting financial goals using their planning software.

Nonetheless, they often overlook individual financial challenges and concerns.

Engaging with a human advisor can provide a tailored investment plan designed to address your specific circumstances.

— Limited Flexibility

Robo-advisors may not accommodate certain investment strategies, such as selling call options or investing in individual stocks.

Investors, especially those with more complex financial needs, may require a broader range of asset classes and investment options.

Such unique opportunities aren’t available through robo-advisors.

— Lack of Human Contact

Robo-advisors lack the personal touch of a human financial advisor.

They do not offer face-to-face meetings or direct interaction with clients.

In contrast, traditional financial advisory models allow clients to visit an advisor’s office and have in-depth discussions about their concerns.

— Absence of Emotional Support

During market downturns or periods of uncertainty, robo-advisors cannot provide emotional support or guidance.

A human financial advisor can offer reassurance, explain market dynamics, and help clients navigate challenging financial situations.

— Limited Holistic Approach

Robo-advisors focus primarily on investment management and may not consider broader financial aspects.

Broader financial solutions offered by human experts include taxes, estate planning, or comprehensive financial integration.

Human financial planners can provide a holistic view of your financial life, addressing various financial aspects in a coordinated manner.

Robo-advisors offer convenience and automation in investment management.

However, they may fall short in addressing individualized needs, providing flexibility, and offering the emotional support and comprehensive financial planning that human financial advisors can deliver.

The Future Outlook

ChatGPT garners attention as a user-friendly technology with transformative potential.

It may not be long before similar AI models play a behind-the-scenes role in guiding professional decision-makers.

A Harvard Business Review article suggests that by 2030, AI, powered by big data and machine learning, could handle up to 80% of project management tasks.

This may include number-intensive projects like portfolio optimization.

However, ChatGPT, at its current stage, offers financial information and principles but does not make investment choices on your behalf.

ChatGPT vs Human Financial Advisor

A ChatGPT, short for “chat-generated pre-trained transformer,” represents an artificial intelligence (AI) program developed by OpenAI in December 2022.

It functions by receiving questions and providing responses.

In its own words, this online AI chatbot is described as:

“A language model created to comprehend and generate human-like language for answering queries, engaging in conversations, and performing various language-related tasks.”

ChatGPT draws its training data from internet text, books, and other sources, facilitating a broad and diverse comprehension of human language.

OpenAI continually updates and enhances ChatGPT to optimize user experiences.

Users can employ ChatGPT for various purposes, such as:
⁃ Texting
⁃ Essay and article writing
⁃ Addressing complex philosophical questions
⁃ Solving analytical problems
⁃ Seeking general financial guidance

However, ChatGPT is not sufficiently ‘intelligent’ to replace a financial advisor.

As I said earlier, it can only offer generalized information and cannot provide personalized financial advice tailored to individual needs.

Here are five reasons why ChatGPT falls short as a financial advisor:

Personalized Financial Planning

Financial planning is inherently personalized, and crafted based on interactions between an advisor and a client.

Two individuals of the same age and financial background can have entirely distinct financial plans.

Emotional Management

Managing emotions arising from financial decisions exceeds the capabilities of an AI chatbot.

Effective financial advisors provide emotional support and guidance.

Realistic Goal Setting

A human financial advisor can help clients set realistic, achievable goals based on their current circumstances and provide information.

This is a task beyond ChatGPT’s capacity.

In-Depth Solutions

ChatGPT relies solely on initial information provided and doesn’t inquire further about a user’s finances.

This limits its ability to offer tailored solutions compared to human advisors who ask probing questions for comprehensive analysis.

Accountability and Adjustments

An AI chatbot lacks accountability for its advice and cannot adapt plans based on changing circumstances.

In contrast, human advisors can make necessary adjustments to clients’ financial plans.

While ChatGPT serves as a valuable tool for various general tasks, it has limitations, as it lacks consciousness or emotions.

As ChatGPT itself acknowledges, it is a software program simulating human-like text-based responses, distinct from living beings with emotions and self-awareness.

Should You Seek Investment Guidance from AI Tools?

AI tools may not always provide entirely accurate information and often avoid offering specific investment advice.

Therefore, it’s essential to complement AI research with personal analysis and consider consulting a human advisor when making significant investment decisions.

Is It Wise to Rely on AI for Investment Advice?

Artificial intelligence tools like ChatGPT have gained popularity, assisting users in various tasks.

With their increasing recognition, some wonder if these tools can aid in making investment decisions.

AI tools may offer basic investment information such as historical data and formulas.

Yet, they don’t track real-time financial data, making it unsuitable for specific investment advice.

Advantages of Using AI for Investment Guidance

Quick access to essential information for informed investment decisions.

Opportunity to become a more knowledgeable investor.

Some AI services can manage your investment portfolio.

Drawbacks of Using AI for Investment Guidance

Limited ability to provide real-time data for sound investment decisions.

AI in this context is still in its early stages and can provide inaccurate information, unsuitable for investment decisions.

Lack of transparency in how AI gathers information, making it challenging to assess the reliability of advice.

How Does AI Investment Differ from Robo-Advisors?

Robo-advisors typically use a computer algorithm to design investment portfolios based on user-provided information about themselves and their risk tolerance.

Unlike AI, they don’t typically incorporate artificial intelligence into their decision-making processes.

Additionally, robo-advisors limit user control over fund selection and individual stock investments.

In contrast, apps like Q.ai operate similarly to traditional robo-advisors.

Nonetheless, Q.ai integrates artificial intelligence to delve deeper into user-specific interests, offering more control over investment choices.

Using a tool like ChatGPT for investment advice means you are still responsible for managing your investments.

The advice serves as a supplement to your research when deciding on your portfolio.

Alternatives to AI Investment Advice

While relying on AI for investment guidance may be tempting, it’s crucial not to over-rely on the information received.

Consider alternative methods to ensure sound investment decisions:

— Read reputable investment blogs and news sources to access the most recent financial data and recommendations.

— Enroll in an online investment course, especially if you’re a novice, to learn the fundamentals of investing and kickstart your portfolio.

— Consult with a human financial advisor. Although this comes with a cost, a financial advisor can help tailor an investment strategy and portfolio to your unique needs, preferences, goals, and risk tolerance, reducing emotional decisions.

— Use an AI investment platform like Q.ai, which can manage your investments using AI and other tools.

Before deciding on any of these options, take the time to research and determine which best aligns with your requirements, needs, and goals.

AI programs can enhance your investment approach but come with limitations.

Avoid solely relying on AI for financial decisions.

Instead, combine AI-derived information with advice from reputable sources.

Consider collaborating with a financial advisor to develop and implement your investment strategy.

Can AI like ChatGPT Replace Regular Jobs?

AI programs such as ChatGPT are proficient in human and coding languages, and they don’t forget information like humans can.

This has raised concerns that AI could automate many jobs, including knowledge-based roles that were once considered safe from traditional factory-style automation.

Consulting firm McKinsey estimated that automation could displace anywhere from 400 million to 800 million workers globally by 2030.

This estimation was provided back in November 2017, five years before ChatGPT’s launch.

Language models like ChatGPT have already started affecting knowledge-based professions, including financial journalism

For instance, in January 2023, the technology website CNET revealed that it had published numerous AI-written personal finance articles.

To explore whether financial advisors could be next, the author of this article asked ChatGPT a series of personal finance questions.

Does ChatGPT Provide Reliable Financial Advice?

ChatGPT is humble about its financial advisory capabilities.

It states, “As a language model AI, I can provide information and insights on personal finance, but I cannot provide personalized financial advice.”

This admission came in a written interview where ChatGPT requested its comments be attributed to ChatGPT and OpenAI.

Here are excerpts from a conversation between the author and ChatGPT.

This includes insights from Rick Nott, a certified financial planner with LourdMurray, a registered investment advisor in California.

Question: “What are some of the best investments for a young person who wants to start saving for retirement?”

ChatGPT started its response by recommending employer-sponsored retirement plans like 401(k)s and traditional or Roth IRAs.

It also mentioned index funds, individual stocks, and exchange-traded funds (ETFs) but advised caution with individual investments.

Furthermore, ChatGPT suggests researching and consulting a financial advisor for a diversified portfolio.

Nott noted that while ChatGPT correctly addressed the question, the first two recommendations were investment methods, not specific investments.

Question: “What are some good ways to increase my income tax refund?”

ChatGPT suggested strategies such as:
⁃ Keeping records
⁃ Claiming eligible deductions
⁃ Contributing to retirement accounts
⁃ Using tax credits
⁃ Adjusting withholding

Nott pointed out that ChatGPT’s answers were incomplete and lacked certain crucial details.

The lacking details included the impact of the standard deduction and details about health savings accounts and flexible spending accounts.

Overall, Nott described ChatGPT’s responses as “70% or 80% accurate.”

What Do Financial Advisors Think About ChatGPT?

Experts don’t fear losing their jobs to an AI like ChatGPT.

They believe that comprehensive financial advisors must understand clients’ needs, values, goals, and important relationships.

I think that there is no “One Size Fits All” solution when it comes to investment advice.

Building trust and rapport with clients often involves delving into personal aspects, something he doubts AI can achieve.

He questions whether humans will ever trust AI enough to reveal their vulnerabilities and secrets.

What Does ChatGPT Think?

ChatGPT suggests that advanced AI technology could play a role in the financial advisory industry in the future.

However, it doubts that AI will fully replace human financial advisors anytime soon.

When I asked ChatGPT “Can AI Replace Financial Advisors?”, It gave me the following answer.

“AI has the potential to enhance various aspects of financial advisory services, but it is unlikely to completely replace human financial advisors in the foreseeable future. Here’s why:

Personalization: Financial planning and investment strategies are highly personalized and depend on an individual’s unique financial goals, risk tolerance, and life circumstances. Human financial advisors can provide tailored advice that takes these factors into account, offering customized solutions that are difficult for AI to replicate.

Emotional Support: Financial decisions often involve emotions and complex human relationships. Clients may seek guidance during stressful financial situations or significant life events. Human financial advisors can provide emotional support, empathy, and understanding that AI lacks.

Complex Situations: AI systems like ChatGPT can provide general information and answer basic financial questions. Still, they may struggle to handle complex and multifaceted financial situations that require nuanced judgment and expertise. Human advisors can adapt to changing circumstances and provide creative solutions.

Trust and Relationship Building: Building trust and long-term relationships with clients is essential in the financial advisory profession. Clients often rely on the trust they have in their financial advisor’s integrity and expertise. While AI can provide information, building trust and rapport is challenging for machines.

Ethical and Moral Decisions: Financial advisors may help clients make ethical and moral decisions related to investments, philanthropy, and financial planning. These decisions involve values and principles that may not be easily handled by AI.

Unforeseen Events: The financial world can be unpredictable, and unforeseen events can significantly impact investment strategies. Human advisors can adapt and provide guidance during times of financial crisis or market volatility.

Regulatory and Compliance Issues: The financial industry is highly regulated, and advisors must stay compliant with changing laws and regulations. Human financial advisors have the capacity to navigate complex regulatory environments effectively.

While AI can provide valuable tools and insights to support financial advisors in their work, it is most effective when used as a complement to human expertise. AI can help with data analysis, risk assessment, portfolio management, and providing quick access to information. However, the human touch, empathy, and personalized guidance that financial advisors offer are likely to remain essential in the field of financial advisory.”

Based on its answer, it is clear that it falls back in several aspects compared to human financial advisors.

Finally, I too believe that there may come a day when AI becomes effective in the field of financial/investment advice.

However, that day is not going to come any time soon, at least for a decade or two.

Bottom Line

I strongly hope that the information presented in the article was useful to you.

If you are an expat or a HNWI seeking efficient wealth management solutions to meet your financial goals, you are in the right place.

Feel free to contact me to find out if you can benefit from the top-notch investment services I offer.

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.