Artificial intelligence (AI) has revolutionized the investing landscape since the debut of ChatGPT in November 2022. This groundbreaking technology has attracted significant attention from investors seeking the next big winners in the market. In 2023, seven major technology giants, including Tesla, Amazon, and Microsoft, contributed to a substantial portion of the market’s growth. However, as with any investment, there are risks involved, especially in the dynamic field of AI.
When considering investing in AI stocks, it is essential to conduct thorough research and due diligence. Jay Woods, chief global strategist at Freedom Capital Markets, emphasizes the importance of understanding what you are buying and the risks associated with it. With AI transitioning from early-stage success to broader adoption, investors should focus on certain strategies for long-term success in this sector.
Carol Schleif, chief investment officer at BMO Family Office, advises investors to pay attention to companies’ cash flow, spending habits, and overall financial health. It is crucial to evaluate how a company manages its resources, including investments in infrastructure and research. In the chip industry, government grants such as the CHIPS Act can significantly impact company performance, making it essential to stay informed on industry developments.
Nancy Tengler, CEO and CIO of Laffer Tengler Investments, recommends looking beyond the high-flying AI winners and considering established companies like Microsoft and IBM. Diversification is key when building an investment portfolio, especially in the AI sector. Exchange-traded funds (ETFs) offer a lower-risk way to diversify by providing exposure to a basket of AI-related stocks. ETFs like Global X Robotics and Artificial Intelligence ETF (BOTZ) and First Trust Nasdaq AI and Robotics ETF (ROBT) can be effective tools for investors looking to mitigate risk.
As with any investment theme, AI stocks can experience volatility and corrections over time. Helen Dietz, a managing director at Aspiriant, warns that newer trends are often more volatile and subject to sudden market fluctuations. For instance, Nvidia’s shares recently experienced a significant decline, underscoring the importance of risk management and long-term strategy when investing in AI.
It is crucial for investors to remain vigilant about their portfolio holdings and be prepared for market uncertainties. While individual stocks may offer high growth potential, ETFs provide a more diversified approach to investing in AI. By selecting ETFs with strong track records, high trading volumes, and low fees, investors can gain exposure to the AI sector without putting all their eggs in one basket. Additionally, ETFs offer flexibility, allowing investors to transition to individual stock picks as they gain more experience and market knowledge.
Investing in artificial intelligence offers exciting opportunities for growth and innovation, but it also comes with inherent risks and challenges. By adopting a disciplined approach, conducting thorough research, and diversifying their portfolios, investors can navigate the volatile landscape of AI investing and position themselves for long-term success in this rapidly evolving sector.