The next generation of robo-advisers might veer into the world of short-term trading and stock-picking.by researchers from the University of Chicago has shown that AI, specifically large language models that have been trained on vast amounts of text and can generate natural-sounding responses, can analyze financial statements as well as, if not better than, human analysts. But before you ask ChatGPT to suggest your next trade, there’s more to the story.
AI can analyze trends, compute key financial ratios, and provide narrative insights about a company’s future performance faster than humans. Professionals will add AI co-pilots to their tool kits, much as software developers are already. Combined with the rise of AI-powered financial analysis, Prof. Sharpe’s logic leads to a compelling conclusion: the best way for most investors to benefit from these technological advancements is through a low-cost, passive indexing approach.
The current generation of robo-advisers generally use low-cost index funds, but some may be actively managing the exposure to different passive products within their portfolios. The range of five-year annualized returns of growth portfolios for Canadian robo-advisers reported bylast fall was between 3.67 per cent to 5.98 per cent, in the period ending Sept. 30, 2023.
However, it’s important to acknowledge that staying passive is easier said than done. One of the hardest things about passive investing is maintaining discipline during market downturns. Investors often believe they can remain unemotional and stick to their plan, but it’s precisely during these times that they are most tested.
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