When someone told me recently that her favorite use of AI is for financial advice, I was horrified. I am a retirement economist, and my first reaction was self pity: Now I know how doctors feel when people use AI for medical questions.
Then I went home and gave it a try. It was not terrible — it gave a clear and engaging explanation of the conventional wisdom on saving and investing. It was the equivalent of a mediocre financial planner, but without the personal touch. That’s probably better than nothing, and it’s bound to become more common as more brokerages offer AI advisers to less wealthy customers.
But it comes with some major weaknesses. And with most Americans unable to answer basic questions about financial markets — only about half believe it is safer to own many stocks instead of a few — I thought it might be appropriate to offer a kind of primer. Finance 101 still explains almost everything, but maybe some of the language could be clearer.
One issue I noticed with the chatbot I used was that it often gave the wrong reasoning behind its advice. Most of the time, that’s not a problem, since most people don’t care — they just want to be told what to do. But the faulty reasoning shows the limits of an AI adviser in the event of an unusual personal or financial event, which is inevitable. There is no shortage of advice about retirement investing, and the number and types of assets are constantly expanding. Yet there is somehow also less transparency and understanding. So here is a kind of guide to understanding how to save and invest in this new market, especially for people who use AI as their financial adviser.
Know what you are invested in. Is it a stock fund, full of public companies that track the market? A municipal bond fund? Commodities (not my favorite)? It’s important not to blindly trust a fund if you don’t know what exactly is in it — and then once you do, to ensure that all the assets have a market price. You don’t need to track that price daily, or even name every security you own, but you should know what kind of assets you have. Just as you should know where your food comes from, you should know what’s in your portfolio.
Diversify. The future is uncertain: AI could transform the economy and bring unprecedented growth, or it could just be meh. Governments are borrowing more than they’ll ever pay back even as populations are shrinking. There is no way to predict the future or time markets, so the best thing to do is buy lots of different stocks, ideally from different countries.
