Investing your hard-earned money can be daunting. You want to make smart decisions and do everything to set yourself up for success, but that’s easier said than done. So how can you do it? Imagine making smarter investment decisions with the help of artificial intelligence (AI).
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This developing technology allows investors to be more informed and find new opportunities beyond typical manual analysis. With its powerful capabilities, AI helps you make better investment decisions while saving time.
Here’s a look at seven ways to use AI to improve your investing strategy today (along with three risks to be aware of).
7 Ways To Use AI To Improve Your Investing Strategy
While AI can’t choose stocks for you, it can help you decide what to invest in. Here’s how.
Stock Picking
Investors can use AI to efficiently sort through U.S.stock market datato identify investments matching their criteria. Stock screeners allow investors to filter stocks on fundamental and technical data points. These criteria could include market capitalization, trading volume, accounting ratios or moving averages.
AI sorts through this data much quicker than humans — and it’s adept at finding patterns that people might miss.
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Risk Management
AI can help money managers and companies manage investment risks by analyzing historical market data, volatility and any corrections that could affect returns. Machine learning techniques also help improve efficiency and reduce costs.
AI analyzes large datasets quickly and with better forecasting accuracy than traditional regression models. AI also captures nonlinear relationships between risk factors and other variables.
Algorithmic Trading
Investment traders can use AI algorithms to analyze large datasets and trade at higher-than-normal speeds. Algorithmic trading can take advantage of price discrepancies like the bid-ask spread, where the gains are small and must be performed in large volumes.
Plus, AI isn’t subject to human biases like human investors. AI algorithms can use market trends and patterns to recommend and make certain trades.
Portfolio Optimization
When managing a portfolio, money managers aim to maintain balance between risk, diversification, income and growth. AI helps money managers optimize their portfolios to balance between these factors or prioritize one over the others.
AI investing programs can advise money managers on what may be missing in their portfolios to have a better balance.
Sentiment Analysis
Market sentiment is the current mood toward a stock or entire market. Market sentiment, along with other factors like earnings reports, geopolitical issues, macroeconomic data and interest rates, affect how the markets move. AI programs help traders assess market sentiment by collecting news articles, social media posts and other online activity to analyze market sentiment and predict movements.
“AI’s ability to analyze market sentiment goes beyond the standard news analytics,” said Skyler Fernandes, founder and general partner at Venture University. “It sifts through vast amounts of unstructured data, including social media posts and online forums, to gauge investor sentiment in real-time. This goes further than traditional indicators, providing investors with early signals of market shifts that might not be immediately reflected in price movements.”
Data Interpretation and Predictions
AI algorithms can be used to predict what a stock will do next. Investors may use AI algorithms depending on what they believe about the market. For example, investors who believe that market cycles repeat might utilize AI tools to identify these cycles.
AI can also help make automatic buy and sell orders based on technical analysis tools for order entry.
Personalized Investment Advice
These AI programs provide real-timeinvestment advicethrough a chat interface, allowing investors, especially anyone without much experience, access to personal investment answers in real-time.
3 Risks of Using AI to Invest
While there are many amazing opportunities associated with using AI-powered tools to help with your investing strategy, there are also a few risks that can’t be ignored. Here are the big ones.
Provides False Confidence
The easy access to complex AI programs helping with investment decisions could provide a false sense of confidence, leading to riskier investments you aren’t prepared for.
As sophisticated as AI systems are, they can’t always predict economic changes, and you may be caught taking unnecessary risks due to a false sense of confidence in your investing abilities.
Regulatory Concerns
AI-based tools and robo-advisers have risen in popularity rapidly, but there are still worries about laws and regulations in this field since investing is a highly regulated industry. Concerns about AI ethics could lead to investors facing financial risks without legal protection.
Some fear that heavily relying on AI for investing could get firms caught up in regulatory investigations, fines and misrepresentation liability. Experts feel that there’s a reason the investment industry is so highly regulated.
Algorithmic Bias
This fear of regulatory issues also ties into transparency concerns and algorithmic bias, as lawmakers are worried about the transparency of AI tools.
One of the biggest risks with AI-powered investment tools is that algorithmic bias could skew the training data due to recency bias, which could mislead customers about possible returns.
With a lack of transparency in AI investment tools, financial advisors could also struggle to help clients understand their portfolio strategies.
Should You Use Artificial Intelligence for Investing?
The decision on whether to use artificial intelligence in investing is personal. Some people may not feel comfortable involving AI in their investments, while others may want to use AI to improve their investment strategy so that they can automate and simplify the process.
Artificial intelligence and its involvement in investing is likely here to stay, and we must learn how to leverage these AI-powered tools.
Sean Bryant contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 10 Opportunities and Risks While Using Artificial Intelligence for Investing
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