Editor's Note: This story comes from Wealthramp.
Investing in emerging technologies like artificial intelligence (AI) presents an enticing opportunity for remarkable returns. AI is hot these days but not without its share of uncertainties.
Investing strategically in AI requires serious homework before diving into the deep end of the pool. The real question for those who want to be part of the future of artificial intelligence might not be how or how much AI exposure, or even when or which stocks to buy.
Instead, you might first want to ask how much AI you already own in your portfolio.
You May Already Be Invested in AI
A super-star in the AI arena, Nvidia (NVDA) is the name we hear because it’s the dominant player.
This tech powerhouse has skyrocketed with astonishing gains. And that alone is enough to produce the kind of FOMO reaction not seen since the spectacular rise and fall of pets.com in the late 1990s.
But here’s a surprise: You likely have a stake in this booming AI stock if you’re an owner of an ETF or a broad-based index fund. According to Vanguard, its own S&P 500 ETF has assets invested in Nvidia stock.
I recently sat down with some of the expert advisors in my Wealthramp network to discuss the whole AI investing trend and explore whether investors like you and me should broaden our investments in this dynamic sector.
How Has AI Impacted You and the Overall Market?
AI as an emerging technology has become a significant driver responsible for remarkable surges in the stock market.
This groundbreaking technology is not only transforming industries like health care and finance but is also leaving a substantial impact on old-world companies like Walmart and Pepsi.
AI is changing overall market dynamics which means it’s impacting your investment portfolio as well.
The current buzz around AI really does mirror the dotcom boom — and just like the early internet days, AI is a revolutionary force poised to redefine multiple sectors.
Yet, amidst all this enthusiasm, businesses are only on the brink of showcasing AI’s true potential to deliver outsized financial returns.
AI Winners and Losers
Wealthramp-network advisor Marc Lieberman of Shorepine Wealth Management, LLC explains that just like the late 1990s internet craze, there will be winners and losers in this space.
“The real implication of AI will be the effect it has on corporate profit margins as industries implement AI into their customer service and business practices. This will likely play out in three distinct areas, AI hardware, AI infrastructure and AI applications/software.”
Undoubtedly, the backbone of AI — its cutting-edge hardware and robust infrastructure like chips, servers and cloud storage — stands to gain significantly as the demand for these innovative products and services skyrockets. Just look at the growth of companies like MicroStrategy (MSTR), Amazon (AMZN) and Microsoft (MSFT).
But Marc says the first two areas will most likely play a huge role in determining who comes out on top for the last.
“The real unknown is who is going to win the applications/software race. As for investments right now, I would focus on the first two areas while keeping a close eye on the emerging winners in the last area.”
Which AI Companies Should You Invest In?
As I mentioned before, many of us are already well-invested in this sector whether we realize it or not. And just like any sector, investing in single players is not a widely recommended investment strategy.
It’s important before making any big investment decisions to analyze the opportunities and even consult an advisor for advice.
Jonathan Smith of Pathway Financial Advisors LLC highlights this isn’t an uncommon discussion he has with his clients. He emphasizes that diversification is key and warns against gambling on individual “winners” in this ever-changing race.
“I would not recommend additional exposure beyond what’s provided in a diverse portfolio. Most people already have good exposure to AI through their well-diversified portfolios. Predicting the companies that will benefit most from this new technology is impossible.”
Stick to Your Plan
Instead of getting caught up in all the buzz surrounding this fascinating space, you should stick to your plan, especially how it relates to your retirement strategy. Your retirement nest egg is sacred and should be protected at all costs.
However, if you are still keen on investing more in AI than you already are, first take into consideration how these investments will impact everything else.
Jonathan went on to explain:
“I would recommend keeping it at a level that would not have the potential to negatively impact the important goals we have discovered during the financial planning process. As we have seen in the past, extreme optimism in any area can lead to prices not supported by fundamentals unless the most optimistic outcomes are achieved.”
So How Much Should You Invest in AI?
The answer? Well, it depends. Every individual is different and has their own definition of risk. Additionally, it’s always important to properly diversify your portfolio to ensure that any significant changes to a specific sector won’t hurt your overall returns.
Betting on one or only a few horses in the race can lead to potentially expensive investing mistakes.
Like Jonathan, Marc recommends keeping a well-balanced portfolio in order to minimize these mistakes.
“You want to ensure there is an allocation to up-and-coming industries or companies but you do not want to ‘bet the farm’ on it. Nvidia is trading on future earnings that are not guaranteed, so I would not bet all my future on those earnings materializing. A lot can happen between now and when AI is fully integrated into our daily lives.”
Have questions about AI and how it’s impacting your portfolio? I’d recommend consulting a fee-only, fiduciary financial advisor. Fiduciary is key because the advisor works solely for you and will provide advice that is only in your best interest.
And I’ll leave you with my number one investing rule: Diversification wins all battles.
Add a Comment