What You Need To Consider Before Adding AI To Your Portfolio

It seems like everybody’s talking about AI these days. And with good reason: AI, short for “artificial intelligence,” has the potential to have a huge impact on all aspects of our lives. AI–the simulation of human intelligence processes by computer systems–is a major factor in the current writers’ strike roiling the entertainment industry and holds big implications for the future of health care, finance and nearly every other aspect of human life and culture.

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How it all started: AI had its origins in the 1950s, when computer scientists began to create algorithms that could perform tasks that once required humans to do, things like problem-solving and decision-making. We see AI at work whenever we call on Siri and Alexa or use facial recognition software or watch a demonstration of a self-driving car.

What the future might hold: According to the Goldman Sachs Macro team, AI adoption could create about $7 trillion in global economic growth over a 10-year period, comparable to a 7% increase in annual global GDP. In April PwC US announced plans to invest $1B over the next three years to expand and scale its artificial intelligence (AI) offerings.

Bill Gates, co-founder of Microsoft recently wrote, “ The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone... Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it. ”

Economics reporter Jeff Cox wrote, “Whether it’s personalized shopping, self-driving cars or a broad array of robotics uses for health care, gaming and finance, AI will become a factor in virtually everyone’s lives.”

As an informed investor, you may be asking yourself,

“Should I be adding AI investments into my own portfolio?”

Investing in sectors such as Artificial Intelligence (AI) offers exciting opportunities for investors. However, it is crucial to understand the potential and risks associated with this rapidly evolving field. Here are some ways we explore sectors and companies before diving into AI investments.

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Research the AI Market:

To make informed investment decisions, it's essential to gain a comprehensive understanding of the AI industry. If you use ChatGPT or Adobe Premiere or even chatted with a chatbot at your favorite retailer, you’ve probably seen a glimpse of the future of AI. This technology will only get smarter and more robust for more industries.

Where to start? Research the current state of AI, its growth potential, and the major players in the field. Keep diversification in mind: instead of individual company names, explore the diverse applications of AI across sectors like healthcare, finance, autonomous vehicles, and more. This knowledge will help you identify investment prospects.

Consider Your Investment Time Horizon and You Risk Tolerance

Investors must carefully assess their investment time horizon and risk tolerance. AI is an evolving field with immense growth potential, but it also carries inherent risks. Investors with a longer time horizon may be able to capitalize on the transformative nature of AI and potentially reap future rewards over the years.

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Adopt a Long-Term Perspective:

Investing in AI requires a long-term perspective. The field is still evolving, and its full potential is yet to be realized. Understand that short-term fluctuations are common, and it's crucial to have patience and a willingness to stay invested for the long haul.

Risk tolerance is another crucial factor.

While AI offers exciting opportunities, it also comes with uncertainties, regulatory challenges, and ethical considerations. Investors must gauge their comfort level with these risks and ensure their investment aligns with their risk tolerance. Diversify your portfolios and speak with us to make informed decisions based on their specific investment profile.

Evaluate the Company's Focus:

When considering AI investments, assess whether the company is primarily focused on AI or if it merely incorporates AI as a small part of its business. Companies with a strong commitment to AI research, development, and implementation may offer better prospects for investors. Look for companies that prioritize AI-driven innovation.

Assess Competitive Advantage:

In the competitive AI landscape, it's crucial to identify companies with a distinct competitive advantage. Seek out organizations with proprietary algorithms, valuable datasets, or strong partnerships. Such factors contribute to a company's differentiation and unique capabilities, positioning them for long-term success.

Analyze Financial Performance: Evaluate the financial health and growth potential of AI companies. Consider factors like revenue growth, profitability, cash flow, and balance sheet strength. Investing in companies with a solid financial foundation is crucial for long-term success and stability.

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Understand the Regulatory Landscape:

Open Ai Inc. chief Executive Officer Sam Altman, who brought us ChatGPT even shared before Congress his concerns and said that companies should have a “combination of licensing or registration requirements.” Stay informed about the regulatory environment surrounding AI technologies. Understand the potential implications of privacy, security, and ethical concerns. Companies that prioritize compliance and address these issues effectively are more likely to thrive in the AI space. Stay attuned to evolving regulations and their impact on AI companies. (source: Bloomberg)

Assess Talent and Expertise:

The availability of AI talent is crucial for successful implementation and innovation. Evaluate the company's access to AI experts and its ability to attract and retain skilled professionals. Human capital is a key differentiator in the AI space, and companies with strong teams and expertise are more likely to excel.

Evaluate Market Adoption and Scalability:

Consider the market adoption potential of AI solutions offered by the company. Look for indications of widespread acceptance and scalability. Companies that can leverage their AI offerings across various industries may have significant growth prospects.

Diversification is Key:

To manage risk, consider diversifying your AI portfolio. Invest in multiple AI-related companies or exchange-traded funds (ETFs) to spread the risk. Diversification helps mitigate the impact of any individual company's performance on your overall investment returns.

Investing in AI presents unique opportunities and challenges. By conducting thorough research, understanding the market, evaluating companies' focus, and considering regulatory aspects, investors can make informed decisions. Adopting a long-term perspective, assessing financial performance, and diversifying your portfolio will contribute to a well-rounded investment strategy. Stay informed about the latest developments in the AI sector and seek professional advice if needed. Remember, investing in AI involves risks, but with careful consideration, it can be a rewarding venture into the future of technology-driven innovation.

The information provided here is for educational purposes only and should not be considered as financial advice. Always conduct thorough research and consult with an experienced financial advisor before making investment decisions. Here are some first steps to take before adding AI to your portfolio:

1. Next Steps: Examine your own portfolio and identify how much you’re able and would like like to invest in AI.
2. Set up a virtual meeting and speak with an experienced financial advisory team about next steps.
3. Regularly review your portfolio to stay up-to-date on your portfolio’s standing and make changes as needed.

By Winnie Sun, Contributor