NerdWallet's Smart Money Podcast - Some Investors Are Using AI to Make Decisions. Should You?

Episode Date: April 24, 2024

Learn how investors use artificial intelligence to make decisions. Plus: AI’s current capabilities and limitations in finance. How does AI affect investment decisions? What are AI’s limitations in finance? Hosts Sean Pyles and Anna Helhoski explore these questions and more with Sam Taube, an investing writer at NerdWallet, who shares insights on AI's role in investment research and stock selection. They break down the potential of AI-powered ETFs and mutual funds, including their performance trends and considerations for investors. They also discuss AI’s current capabilities and limitations in investing, how AI can streamline your investment research process when used correctly, and why caution and human oversight remain essential.  In their conversation, the Nerds discuss: artificial intelligence investing, AI in finance, investing with AI, AI-powered funds, AI investment research, AI stock selection, limitations of AI in finance, AI and financial decisions, using AI for investing, AI in mutual funds, AI in ETFs, AI in the stock market, AI for investment analysis, AI and investment strategies, benefits of AI in investing, AI in financial services, AI in wealth management, AI and investment performance, risks of AI in investing, AI and market predictions, AI for portfolio management, AI and stock picking, AI investment tools, impact of AI on finance, AI for financial advisors, future of AI in investing, AI and asset management, AI and robo-advisors, AI and hedge funds, AI for investment recommendations, challenges of AI in finance, AI and investment banking, AI in retirement planning, AI for financial decision-making, AI in trading, AI for risk management, AI and wealth advisors, AI and investment analysis tools To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Today, we're talking about investing with artificial intelligence. Yep. AI isn't just for writing your college application essay, creating generic pop songs, or designing surrealistic images of mutant cats. You can also use it to invest. That's right, Anna. We'll be joined today by Sam Taub, an investing writer at NerdWallet,

to explain just how investors use AI to make decisions. That's up next after the break. Sam Taub, welcome back to Smart Money. Thanks. Great to be here. So Sam, there's a lot of hype around AI. Is it a good partner for investors? I think it can be if you use it for the relatively narrow set of tasks it's good at right now. All right. And what are some of those tasks? Because I assume AI isn't rebalancing our portfolios, at least not yet. No, definitely not. For now, one of the most popular uses of chatbots like Anthropix Cloud or OpenAI's ChatGPT is to summarize long pieces of text, and that can certainly be useful for investment research.

Suppose you're considering investing in an actively managed mutual fund, but you're on the fence about it, so you want to do a deep dive into its holdings and its fee structure and its track record and so on. The fund prospectus probably contains all that information, but the prospectus is also probably like a hundred page PDF. So asking an AI chatbot to summarize the major points for you, that could save a lot of time. It sounds like it could save us a lot of time writing articles too, but I guess that's what NerdWallet pays us for. So what else is AI good for when it comes to investing?

Another thing is like brainstorming. Say you're looking for environmentally friendly companies to invest in that also pay dividends. You could look for suitable stocks by fiddling around with a stock screener for a while or with Google. Or you could just ask an AI list some for you. And that might be easier at this point. Now, you mentioned that there's a narrow set of tasks that AI is really suited for. What are some investing related tasks that AI isn't good at? Yeah, it's an important question. I think one of the biggest misconceptions about AI is that it has all of the answers or that it's some kind of math

and predictions whiz. You know, science fiction set us up to think of AIs as perfectly logical and all-knowing. But AI assistants like ChatGPT and Claude are really specialized at just generating text and images. And they're actually really bad at math, including like basic counting. Yeah, I've heard that getting ChatGPT to generate a picture of exactly eight elephants is surprisingly hard. It is. I tried that experiment before we recorded this

and it might give you a picture of five elephants or 17 elephants. It gets the elephant part, but numbers are not its forte. And you can see how that might be a problem for certain investing tasks, right? I mean, I wouldn't ask an AI to tell me, I don't know how much capital gains tax I owe from a stock sale, because I'd be worried it would mess up the math. More broadly, I'd briefly double check any factual claims or numbers Claude or ChatGPT gives me, and I certainly wouldn't ask either of them to predict

what the market's going to do next. Yeah, as we often discuss here, trying to predict the future of the stock market is a bad idea, whether you're a man or a machine. Okay, so moving on, can you explain how AI powered ETFs and mutual funds work? Yeah, it depends on the specific fund. But generally speaking, these funds use AI to pick stocks to invest in the AI is doing the job of a fund manager. So there's there's an oft repeated observation that chatbots like chat GPT and Claude are just glorified next-word predictor machines, and these fund manager AIs are next-rising stock predictor machines, in a sense. Some AI-powered funds just kind of turn their AI loose and let it trade stocks however it wants.

Others are more specialized AI-powered ETFs. You've got AI value ETFs, large cap ETFs, and so on. And do you see AI-powered funds as a good investment? Well, the question of what is a good investment will vary from person to person based on your goals and timeframe. Also, these funds and this technology is very new and past performance doesn't necessarily predict future performance. Of course. And it's always a good idea to consult a financial advisor if you're unsure about an investment decision. Definitely. But having said all that, the performance of AI powered funds has not exactly filled me with confidence so far. I was able to find seven AI-powered ETFs that have been on the market for at least a year,

and only two of them have outperformed the S&P 500 in that year. Most are doing a lot worse, and a few even have negative returns for one year. Wow, that's not great for a year when the market is up 20%. Nope. Now, granted, AI is improving at an ever quickening pace. I mean,

think about what AI images looked like a couple of years ago compared to what they look like now. Maybe the AI stock picking technology behind these funds will improve too. But for now, I don't know if it's ready for the big leagues yet. Yeah, I mean, if it can't count, maybe don't rely on it for stock picks. Well, Sam, thanks for joining us today. Of course. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373.

That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Vigeland and edited by Ariel O'Shea. Sarah Brink mixed our audio. Here's our brief disclaimer.

We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.