Artificial intelligence is all the rage these days.
Some attorneys use it to write legal briefs to judges and computer nerds use it to write programming code. However, some experts have predicted it could lead to the end of civilization.
So I wondered: Can AI replace an investment adviser? Lots of people ask me questions; should I simply refer them to ChatGPT?
I tried this idea out, using a handful of questions that investors might ask.
ChatGPT’s responses were lightning fast. But they weren’t very sophisticated. I think a reasonably competent high-school student who was not familiar with the topic could have done at least as well.
You be the judge.
Q: Is cryptocurrency still a good investment?
Here I was hoping for some admission that relatively few cryptocurrency investors have actually profited.
Instead, I got a list of “risks and considerations,” including volatility, lack of accountability, speculation, and the fact that cryptocurrency’s actual usefulness in the real-world is close to nonexistent. In other words, there is no “there” there.
When I did a Google search for the same question, I got the following, but without any indication where the data came from:
“A higher percentage of cryptocurrency investors have lost money than made it. 38% of Americans who’ve held a form of the currency say they’ve sold it for less than when they bought it, versus 28% who say they made a profit. Only 13% say they broke even.”
Click here to see the full answer and my comments.
Q: Are index funds really better than actively managed funds?
The academic research indicates that over the long haul, very few actively managed funds have matched, much less beaten, the performance of index funds in comparable asset classes.
ChatGPT, however, didn’t want to take a position. It acknowledged that this is a topic of longstanding debate “and there are proponents on both sides.”
The answer referred to lower expenses of index funds, but it gave no data.
Here’s part of that answer: “While index funds offer low costs and consistent market returns, actively managed funds have the potential for outperformance if managed skillfully.”
That of course is part of the typical sales pitch of every active manager: There’s the potential for something great.
The same is true of every lottery ticket you could buy. And technically, a serial killer “has the potential” to become a good spouse and a loving parent.
“Ultimately, the choice between index funds and actively managed funds depends on your investment goals, risk tolerance, and personal preferences. Many investors choose a combination of both …”
The academic research overwhelmingly points to the probability of higher returns from index funds. But apparently, at least to ChatGPT, that doesn’t matter.
You can find the full answer and my comments here.
Q: I’m 25 and just inherited $20,000 that I don’t need right now. How should I invest this money?
ChatGPT failed to give any clear answer. It said I should consider starting an emergency fund, starting “a side business,” investing in my education, and paying off any high-interest debts.
Other suggestions:
- Put part of the inheritance into a tax-advantaged account such as an IRA or 401(k) plan.
- Diversify in low-cost index funds or ETFs.
- Seek professional advice.
Those last three suggestions are good, but the answer gave me no clue how to choose an adviser or index funds.
Click here for the full answer and my comments.
Q: What are the best stocks to buy right now?
ChatGPT admitted it was not qualified to answer this. It suggested I analyze market trends, evaluate company fundamentals, consider my financial goals and risk tolerance, stay on top of the news, and remember that stock returns are not guaranteed.
That’s not much help if you’re looking for stock tips — which, by the way, you shouldn’t be doing anyway.
Although ChatGPT suggested diversifying, it made no mention of mutual funds or ETFs.
My comments and the full answer here.
Q. My brother-in-law says I should invest all my retirement savings in the Fidelity Fund. Is that a good idea?
I hoped the bot would tell me how this specific mutual fund might fit into a long-term plan. Didn’t happen.
In fact, ChatGPT didn’t give any evidence that it knew anything specific about the Fidelity Fund.
Because my question didn’t specify whether I was 20 years old or 60 years old, I hoped (alas, in vain) for some suggestion of a target-date retirement fund for at least part of my portfolio.
Here’s the full answer and my comments.
Q. Are there advantages to investing in load mutual funds?
Here again, I think the answer involves simple mathematics.
ChatGPT’s answer lists four “advantages” of load funds, each of which boils down to hand-holding by a salesperson.
The following sentence in this answer is blatantly misleading.
“It’s important to note that load funds come with costs in the form of sales charges, which can impact the overall returns of the investment.”
With a change of just two words, you could make that statement unquestionably true. Take out the words “can impact” and substitute “inevitably reduce.”
Here’s the simple math:
If you invest $1,000 in a no-load fund that compounds at 10% for 20 years, your full $1,000 is invested. You wind up with $6,727.
If instead you put that $1,000 into an otherwise identical fund that charges a sales load of 5.75%, only $942.50 of your money is invested. After returns of 10% for 20 years, you wind up with $6,340.67.
The “mere” $57.50 you paid in a sales commission actually cost you $386.83. That’s nearly 40% of your total initial outlay.
Here are the full answer and my comments.
This little exercise tells me that investment professionals don’t need to worry that they’ll become obsolete any time soon because of artificial intelligence.
I asked ChatGPT some questions about the advice that’s offered to millions of people by Dave Ramsey. To see those questions — and the responses I got — check out my podcast.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement. Get your free copy.
