Artificial Intelligence (AI) and Investing

The secret is out: AI keeps the personal in modern personal finance.

Wherever you turn, it seems like artificial intelligence (AI) is making its presence known. For investors, AI is increasingly relevant—the hyper-personalization, fast response times, and keen data analysis it’s known for in other industries has translated into the personal finance space.

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An AI assistant understands natural language search and guides users toward a particular goal. AI assistance in investing creates an opportunity for individuals to strengthen their own know-how and make educated decisions with a little help from an AI friend.

To understand how AI and investing interact, you can’t ignore the AI assistant’s role in it all.

AI plays many roles in the wealthtech space, but AI assistants stand out

AI innovation has come a long way since its first foray into the stock market.

In 1988, Jim Simons launched Renaissance Technologies, the first hedge fund to use algorithmic predictions to inform its trading decisions (a practice called quantitative trading).

Today, AI serves as the backbone for robo advisors, or automated financial advisors that allocate the money you deposit according to your general risk tolerance (how much risk you’re willing to take on) and time horizon (how long you have until you want to withdraw your investments).

Only 1% of people with investments use robo advisors, according to a 2022 survey by Lending Tree, suggesting there is still a lot of hesitation around giving up control to non-human decision makers.

AI plays other roles in the financial markets, including in asset management. At the institutional level, AI creates alternative datasets, growth opportunities, automated insights, and more to help manage client portfolios. On the back end, it powers risk performance, on-demand reporting, and operations intelligence, among other tasks.

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But this use of AI in asset management is still removed from the retail investor (the term for an individual investor who buys stocks and funds for their own brokerage or retirement accounts).

AI assistants, on the contrary, answer questions and provide solutions for curious investors who want to dig deeper into the stock market without becoming overwhelmed.

The stock market is notorious for being saturated with jargon, and there are more options than ever for people to choose their investments based on industry, type of fund, and overall strategy based on their unique financial goals. That’s exactly why 41% of people are afraid to invest due to a lack of confidence, according to a recent study by AI investment platform, Magnifi.

Where AI-fueled investing was once accessible only to the wealthy elite, it has become increasingly accessible over the years. Now, AI right on your phone or laptop makes it possible for the everyday investor to better understand the once-elusive stock market—but how? Let’s visualize an AI assistant’s true capacity by delving into an example of how it works.

Where automation omits freedom of choice, an AI assistant enables it

Rather than investing for you (like a robo advisor), AI technology helps you direct your own investing. Here’s an example of what that can look like:

Ciaran is a 30-year-old software developer living in Massachusetts. He has been contributing to a 401(k) and getting that sweet 4% employee match over the course of the last seven years of full-time employment. After learning about the FIRE (financial independence, retire early) movement, Ciaran is interested in upping his investments outside of a restricted retirement account he can’t withdraw from until age 55. Ciaran wants to generate investment income he can begin to access in 15–20 years.

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After researching his options, Ciaran lands on an AI assistant that answers all his inquiries about the stock market and gives tailored recommendations based on his unique goals.

Ciaran asks his AI assistant questions like:

How are the markets performing over the last month?
How can I invest in female-led companies?
What ETFs have medium risk with a track record of more than 3 years?
What are some diversified fixed-income ETFs?
What funds have high dividends?

These questions and more help Ciaran learn about stock market trends and become informed about his options. He also spends some time sifting through common questions and market insights, which helps increase his knowledge without him having to come up with questions at all. Ciaran can then ask follow-up questions based on that gifted insight.

Ultimately, Ciaran’s AI tool enables him to craft an investor-specific diversified portfolio, equipped with medium-risk funds, socially responsible stocks, and passive dividend income.

What does this example tell us about the AI assistant’s capabilities?

Unlike automated AI solutions like robo advisors, which limit choice, user-guided AI broadens horizons without defined boundaries. With this, the user makes the rules—the AI just identifies the possibilities.

Transforming the everyday investor’s reality with AI assistance

With AI, everyday people looking to grow their money no longer have to invest in the dark. Using AI to invest and build your own self-directed portfolio makes it possible—and plausible—to invest in ways once reserved for elite hedge funds managing millions and billions of dollars. You can understand the market and reap the benefits of long-term stock market returns unparalleled by cash-based savings solutions.

This is good news, because you can miss out on at least hundreds of thousands of dollars in your lifetime by choosing a savings account over an investment strategy. By simply redefining what’s possible, the outlook of your future quality of life can tremendously improve.

Ultimately, the application of artificial intelligence to personal finance is part of a broader network of stock market democratization (aka the movement to make investing more accessible to more groups of people). Still, AI assistance stands out in one key way: It assists without cutting off the user’s power of choice. That’s something other forms of AI investing solutions cannot say, and it shows a real shift in AI’s place in investing.

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References:

Zuckerman, Gregory, "The history of blunders and missteps that led to the quant trading revolution," Quartz, 6 November 2019, https://qz.com/1741907/renaissance-technologies-jim-simons-and-the-birth-of-quant-trading.
Evans, Julie Ryan, "63% of Americans — Led by Millennials — Open to Using a Robo-Advisor," 3 October 2022, Magnify Money by LendingTree, https://www.magnifymoney.com/news/robo-advisor-survey/.
"Artificial intelligence The next frontier for investment management firms," Deloitte, https://www.deloitte.com/content/dam/assets-shared/legacy/docs/perspectives/2022/fsi-artificial-intelligence-investment-mgmt.pdf.
"5 Year-End Tips to Make the Most of Your Investments," Magnifi, https://invest.magnifi.com/investing2022/.
Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Rosenburg, Eric, "Here’s How Much Money You Lose by Not Investing," the balance, 30 March 2022, https://www.thebalancemoney.com/money-lost-by-not-investing-4145458.