AI Investing
Artificial intelligence (AI) is a type of computer technology that aims to mimic human-like reasoning. AI is creating new opportunities in many fields, including investing.
What is AI?
“Machine learning.” “Deep learning.” “Generative AI.” “Natural language processing.” “Neural networks.” All of these are facets of AI that enable it to increasingly surpass humans’ ability to synthesize information, perform certain tasks, and to provide answers in plain language, even conversational language.
Despite all the attention AI has been attracting recently, AI isn’t new. Some AI approaches, such as changing a PDF into a Word document, are now commonplace; while others (notably generative AI, such as ChatGPT) have only recently become sophisticated enough and user-friendly enough for widespread adoption. Examples of AI you may encounter in daily life include self-driving cars, language translation, photo classification tools, medical imaging analysis, and chatbots that enable users to “converse” with software, whether it’s for a customer service inquiry or a question for the entire internet.
How AI Might Help in Investing
AI is attracting interest from investment professionals because it can analyze huge amounts of data quickly, enabling it to assist with researching and picking stocks, predicting market trends, optimizing investment portfolios, managing risks, and building custom portfolios based on an investor’s preferences and risk tolerance.
Portfolio Building and Optimization
AI can assist with building and balancing portfolios by analyzing and making suggestions about diversification, risk, and other factors. It can also suggest improvements and help manage portfolio adjustments.
Some argue that AI is less bias-prone than human analysts when it comes to accurately assessing risk and diversification, and suggesting portfolios that align with the investor’s risk profile. However, AI software in these areas is novel and untested over a long time period. AI portfolio optimization tools may make unwarranted conclusions, rely on sensitive data or prohibited grounds, and make errors like any other piece of software.
Stock Picking
Securities listed on exchanges have many published data points that inform investors so they can choose what stocks to invest in, such as financial reports, fundamental analysis, technical analysis, and others. AI sorts through large amounts of data to help investors identify stocks that meet their criteria.
AI software for selecting, filtering, and researching investments is fundamentally just software, and may be subject to bugs, hacking, may ignore or omit certain sources, and falsify or invent data. AI stock pickers may also suggest inappropriate investments, such as securities that don’t fit an investor’s risk profile, are unlawful to hold, and may subject the investor to unwanted tax consequences. Investors should conduct their own research or consult a registered investment professional before using AI-powered stock picking tools.
Trading and Trade Management
AI tools can be used to manage trades by monitoring market conditions and executing trades based on user-set criteria. This includes tools for buying and selling investments based on specific conditions. An example would be using tools to purchase a security if it meets criteria set by the user, then manage an exit strategy that could entail a conditional order.
Rapid trading is an extremely advanced strategy, and most short-term traders lose money. AI algorithms that claim to reduce or eliminate the risks in holding short-term positions for investors are unlikely to do so in reality. Stay vigilant and wary of such claims.
Algorithmic Trading
Algorithmic trading uses a complex set of software and rules to analyze large sets of data and make trades based on market trends. It’s an application that would most likely be used by investment professionals, and perhaps sophisticated and dedicated day-traders.
Most algorithmic trading relies on patterns and market movements that are too fast for human reaction speeds, such as high-frequency trading. Because computers can process data faster than humans and are not influenced by human biases, algorithmic trading can often extract value from small market movements. Algorithmic trading often focuses on small price differences and requires high trading volumes to be effective.
Steps You Should Take When Using AI for Investing
If you want to use AI as part of your investing strategy, consider the following.
- Know your investment goals and risk tolerance
Although AI can be a tool to help you achieve your investment goals, it’s important you first understand what your goals are and your risk tolerance.
- Do your research
It’s important to do thorough research before you make the decision to use AI. Read legitimate reviews, compare platforms, and talk to registered investment advisors to get a better understanding of what’s right for you. Use critical thinking skills – if something sounds too good to be true, it probably is.
- Monitor your investments
AI-powered investment tools can be helpful, but keep in mind they’re not perfect. It’s important to monitor your investments closely and ensure they continue to align with your goals and risk tolerance.
- When in doubt, consult a registered professional
Under Canada’s regulatory regime for investment advisors and dealers, registered professionals who are permitted to advise on purchasing investments must meet a certain educational standard, pass a background check, report their status to the regulators on a periodic basis, and may be required to compensate investors for bad advice. These requirements are aimed at providing investors with a safer, fairer, and more equitable access to the investment markets than they would potentially get with AI, which is currently risky, untested, and largely unregulated.
Don’t Rely on AI Alone
AI investment tools are just software, not magic. Be cautious about using AI-generated information for investment decisions. The data AI uses might be inaccurate, outdated, fabricated, or illegal, and even when based on accurate, valid data, the information resulting from AI can be faulty, or even completely made up.
It’s important to remember all investments carry risk, and using an AI-powered tool doesn’t decrease your risk. Assess the quality of the AI tools, the company offering the tool, and learn how to use them. AI may be able to help identify high- and low-risk stocks, but faulty algorithms or too many investors trading on the same AI information can pose risks.
Always cross-check the information AI provides, and if you use it, consider it as just one part of your overall investment strategy.