How Will AI Impact Your Portfolio? (EP.105)

0:28We all need to make smart decisions with our money. of AI, especially regarding its potential impact on the financial markets and investment opportunities. In this episode, I'm going to briefly answer the two most common questions I'm hearing from clients, family, and friends. The first is, are you investing in companies that are at the forefront of AI? And the second is, are you incorporating AI into portfolio construction. As a reminder, this podcast is meant for educational purposes only and is not investment advice. There's a full disclaimer at the end of each episode, but I wanted to emphasize that point at the beginning because I'm going to be naming specific companies to help answer these very common questions.

1:13And as always, you can find links to the resources mentioned during the episode by visiting thelongterminvestor.com. While you're there, be sure to subscribe to my newsletter or schedule a call to learn how we help successful individuals around the country reduce their tax bill, proactively manage cash flow, and make prudent investment decisions. Now, let's tackle that first question. Are you investing in companies that are at the forefront of AI? Well, at a high level, there is no single AI industry. It's not as if we can run a report to detail our exposure to AI companies. There's something called the Global Industry Classification Standard, or GICS, that systematically identifies every company by sector, industry group, industry, and sub-industry.

2:04They have 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries. So if you want to run a report knowing how much exposure you have to any of those particular segments, it can be done. But there isn't an AI sector, industry group, industry, or sub-industry. So when people ask, are we having exposure to companies that are at the forefront of AI, I kind of can break that question down into a couple of different questions. The first being, are you investing in the chip producers that are leading the way in AI? Now, this one's going to depend on the portfolio and how it's constructed.

2:47But the fact of the matter is that it has tended to be the larger chip producers that have heavily invested in producing chips and semiconductors that have so far powered AI and machine learning. In the U.S., the largest name that has been constantly mentioned on the chip side is NVIDIA. And this is a large cap stock that is held in many passive or rules-based U.S. core strategies with large cap exposure. Now, if I'm looking at broad international index funds or rules-based core strategies, they're going to have exposure to some of the larger chip makers in the international markets. These would be companies such as ST Microelectronics or Infineon Technologies.

3:29For emerging market strategies, you'll often see exposure to Taiwan Semiconductor, which is one of the largest chip producers in the world. Now, another relevant question on this topic is, are you investing in companies that are leading the way on creating AI products, such as ChatGBT? The company that brought AI to the attention of most investors is OpenAI, which is the creator of ChatGBT. Now, OpenAI is not a publicly traded company, so you won't directly own it in any sort of ETF or mutual fund. OpenAI was originally launched as a nonprofit organization, but now has a for-profit arm that caps the profits it can earn.

4:09Several large firms have invested in this for-profit arm of OpenAI, most notably Microsoft, which initially invested$1 billion in OpenAI in 2019 and has since increased their investment at the start of 2023. So while you can't have a direct OpenAI investment, anyone with a passive total U.S. market or U.S. large cap position, as well as many people with broadly diversified rules-based U.S. core strategies will have exposure to Microsoft. It's possible you have exposure to other companies that have invested in open AI or other AI companies under similar circumstances that just haven't been publicly disclosed yet.

4:51But beyond this exposure, many of the major tech companies in the U.S., such as Alphabet, Microsoft, IBM, etc., have been investing heavily in AI for years. And in international markets, for example, SAP, which is a German multinational software company has been recognized as a leader in AI for SaaS or software as a service companies. Now, this is not to say that these are the only companies making investment in AI, but they are good examples of some of the larger ones that most globally diversified investors have exposure to. The one final piece of this first question that I think is relevant is, are the companies you're invested in incorporating AI into their businesses?

5:38So as I just mentioned, many different companies have been using AI in their business for a long time. Everything from automated call centers, fraud detection and credit cards, self-driving cars, to even healthcare. There's probably no single sector that will not be disrupted by AI in some regard. And just to kind of give you a sense of how ingrained it is in our everyday life, I'm just going to quickly look at two companies. Amazon, to me, is an obvious example with its digital voice assistant, Alexa. But AI is ingrained in many of the aspects of its business. For example, Amazon uses AI to collect data about your buying habits and personal life, so much so that it's able to predict that you'll need something before you even recognize it.

6:24Not only does this allow them to recommend those items at just the right time, but allows them to move inventory around the country in a manner that shrinks the shipping time and costs required to deliver things in one or two days. AI also powers the new convenience store concept called Amazon Go. And depending on where you live, it's possible that you aren't familiar with these brick and mortar offerings. I've only seen the technology in St. Louis at sporting venues, but I've seen full stores using the technology in New York and in San Francisco. And basically, the stores have AI track the items that you pick up and then just automatically charge you for those items without any need to go through a checkout process.

7:06Now, if talking a lot about Amazon, the other obvious everyday example, in my opinion, is Apple, which introduced Siri in 2011. And today, so many of the features and conveniences an iPhone provides every day is the result of AI realizing where you are, what's going on around you, and what you're looking for, thereby supporting you to save time and relieve stress. To me, this might actually be the best example of how prevalent AI is in our everyday lives. Because artificial intelligence in iPhones is powering multiple features and more apps than you may even realize. And the examples, they go on and on and on, especially if you're digging into IBM or Google or Facebook.

7:49But it goes well beyond big tech too. There's healthcare, financial services, industrial, Basically, everyone has been investing in AI and machine learning for a long time now. Now, I'm going to move on to this second question that I get quite frequently, which is, how are you incorporating AI into your portfolio construction? One thing that may surprise you is that I'm not particularly worried about AI putting us out of business. I actually spoke at length about this with industry thought leader Michael Kitz's in episode 102, an episode that is an absolute masterclass on the evolution of financial advice.

8:24so I really do hope you check that out. But to me, AI today is mostly a really cool calculator. It can't discover the problem for you. You have to figure out what to ask it. From a financial planning perspective, most people have trouble identifying the real problems and pain points of their financial lives, and we as advisors uncover them ourselves through multiple conversations over the course of days, weeks, or even months. AI isn't a tool to help you figure that out, but advisors can use AI as a tool, and already do in some respects, to be much more efficient in the work they do to assist clients.

9:05From a portfolio construction perspective, there are things that AI can and can't do. AI can be utilized in investment strategies by analyzing vast amounts of data and identifying patterns and trends that may not be easily recognizable to humans. AI algorithms can process information from various sources such as financial statements, news articles, social media sentiment, and market data to generate investment insights and recommendations. But while AI algorithms can analyze historical data and identify patterns, it's important to note that predicting market trends and providing accurate forecasts is pretty challenging.

9:46Financial markets are complex, adaptive systems that can be influenced by numerous factors, including economic conditions, geopolitical events, and human behavior, making it difficult to accurately predict future outcomes. So AI can enhance analysis and decision-making processes, but it's not foolproof. The way markets work isn't that different than AI to begin with. The whole market behaves like a big neural network that's compiling different pieces of the information stream to come to a continuously evolving price, reflecting the most current events and consensuses. Having an AI algorithm to attempt to outsmart the market price doesn't seem to be a promising enterprise.

10:30And given that the market is an AI-like process, using that market price together with company financials in a way to create higher expected return portfolios maybe is a better process. Now, that's not to say that AI does not play a role in portfolio construction, but it's more likely to be relevant in data cleaning for financials or automating reconciliation, which can reduce costs and increase accuracy. If you have other questions about how AI is going to impact our industry or your portfolios, go ahead and leave those in the reviews wherever you listen to podcasts. You can always reach out to me if you subscribe to my email newsletter, which again, you can find at thelongterminvestor.com.

11:14As always, thanks for listening and to Long-Term Investing. Thanks for listening to the Long-Term Investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.