ChatGPT as an Investment Assistant

Can ChatGPT really create a well-working investment strategy for a private investor?

Can ChatGPT teach financial literacy, suggest general investment advice, and help create diversified portfolios? Will replace creativity or decision-making in investing?

In today’s dynamic world of investing, the ability to quickly analyze market trends, identify potential risks and opportunities, and create effective investment strategies is crucial. It is not a secret that a huge part of decision-making on the Wall Street is made by artificial intelligence algorithms. With the help of AI, investors have access to powerful tools that can help them make better trades or create investment portfolios. Even though not everyone can create complicated algorithms with AI’s help, there are many other easier tools for non-professional investors. Among these tools is a very well-known ChatGPT that can be accessed by everyone. With its ability to process vast amounts of data and provide actionable insights, ChatGPT might become a valuable resource for investors. But can ChatGPT really create a well-working investment strategy for a private investor? Let’s check it.

Many users, when using ChatGPT for the first time, face common problems when asking specific questions and seeing responses like:

„As an AI language model, I do not have personal opinions or biases… “;

„As an AI language model, I do not have access to up-to-date financial information… “;

„As an AI language model, I cannot provide financial advice… “.

ChatGPT is not the tool that will give you some insider information or a step-by-step plan of how to become rich. First of all, ChatGPT’s database is from 2021, and before, it had no up-to-date information on financial markets. Moreover, even if it had this information, it would be not smart to suggest a user invest in any specific products. Even financial consultants don’t do it before they have a full picture of the client’s financial goals and risk profile. You need to be more specific with your expectations. So, the best strategy would be to start with a more general approach and use ChatGPT to its strengths.

ChatGPT as an investment advisor

Some studies show how effective it can be in portfolio management, particularly in asset allocation and diversification. Some results showed that ChatGPT’s asset selection was more diverse and had less correlated assets than randomly selected portfolios. This reduced the risk and produces better performance of a portfolio.

When asking the AI tool, „How should I invest 10,000$? “this is the typical answer one will get:

„How to invest $10,000 depends on your investment goals, risk tolerance, and time horizon. Here are some general suggestions to consider:

  1. Start with an emergency fund: Before investing, it’s important to have some cash set aside in case of unexpected expenses or emergencies. Consider setting aside 3-6 months of living expenses in a high-yield savings account.
  2. Invest in a diversified portfolio: A well-diversified portfolio can help reduce overall risk and provide potential for long-term growth. Consider investing in a mix of stocks, bonds, and other assets, such as real estate or commodities.
  3. Consider low-cost index funds or ETFs: Index funds and ETFs are a low-cost way to gain exposure to a broad range of assets. They also provide the benefit of diversification and can offer good long-term performance.
  4. Don’t put all your eggs in one basket: Avoid investing all your money in a single stock or asset class. Diversification is critical to reducing risk and maximizing potential returns.
  5. Consider tax-efficient investing: Depending on your tax situation, consider investing in tax-efficient vehicles, such as a Roth IRA or tax-efficient ETFs, to maximize your after-tax returns.
  6. Seek professional advice: If you are uncertain about how to invest your money, consider seeking the advice of a financial advisor who can help guide you based on your specific needs and goals.

Remember, investing always comes with some level of risk, so it’s important to consider your personal circumstances and do your research before making any investment decisions. “

So, these are the most common pieces of advice one could hear from any investment specialist. ChatGPT can be a good assistant for those who want to learn more about general investment approaches and in some ways replace the finance coaches who teach newcomers about financial literacy. But what if you want to get more specific recommendations?

Well-diversified ETF portfolio

By asking to create a well-diversified ETF portfolio for the investment period of 10 years with an initial investment of 10,000$, we get:

„Here is an example of a diversified ETF portfolio that could be appropriate for a long-term investment period of 10 years, with an initial investment of $10,000:

  1. Vanguard Total Stock Market ETF (VTI): This ETF provides exposure to the entire U.S. equity market, including small-, mid-, and large-cap stocks. It has a low expense ratio of 0.03% and is a core holding for many investors.
  2. iShares Core MSCI EAFE ETF (IEFA): This ETF provides exposure to developed markets outside of the U.S. and Canada, including Europe, Asia, and Australia. It has a low expense ratio of 0.07% and is a good way to diversify globally.
  3. Vanguard Total Bond Market ETF (BND): This ETF provides exposure to the entire U.S. bond market, including government, corporate, and mortgage-backed bonds. It has a low expense ratio of 0.035% and can provide stability to a portfolio.
  4. iShares U.S. Real Estate ETF (IYR): This ETF provides exposure to U.S. real estate investment trusts (REITs), which can provide diversification and potential for income. It has an expense ratio of 0.42% and can serve as a hedge against inflation.
  5. Invesco DB Commodity Index Tracking Fund (DBC): This ETF provides exposure to a basket of commodities, including oil, gold, and agricultural products. It has an expense ratio of 0.85% and can serve as a diversifier and inflation hedge.

It’s important to note that this is just an example of a diversified ETF portfolio, and the specific allocation should be based on individual goals, risk tolerance, and time horizon. Additionally, past performance does not guarantee future results, and investing always carries risk. It’s important to do your own research or consult with a financial advisor before making any investment decisions. “

As seen from the response, we get a well-diversified portfolio from such asset classes as stocks, bonds, real estate, and commodities, everything following the previous advice from the conversation. The historical performance of this portfolio over the last 10 years (March 2011 to March 2021) was 6,94%, assuming an equal allocation to each of the five ETFs. Taking into consideration the lower inflation in that period, the return is quite good for such a diversified portfolio, but historical performance cannot always guarantee the same future performance. So, it’s more a task of an investor to try to predict it.

However, ChatGPT can help by suggesting some general trends in the market. It assumed that technology (AI, cloud computing), e-commerce, healthcare (for example, telemedicine), renewable energy, and entertainment sectors will be the most booming in the next 10 years. It can also you some stock examples from each of these sectors as an investment idea.

Coding with ChatGPT

What if you want to get more advanced? It gets more interesting if you already have some investment background, especially can analyze the data yourself and need more assistance in decision-making. ChatGPT can, for example, write code in Python that can download the data needed for analysis, build financial models for predicting results, create charts, or even make reports. It can be useful for data scientists as it optimizes the algorithms for data analytics and even takes advantage of further AI models by using ready-written programming codes.

Many of us have already heard that ChatGPT can beat some programmers in the job application process, however, one won’t get any use of it if he doesn’t understand the codes it writes. It is more of an assistant rather than a replacement for some analytical jobs, as it still makes some mistakes and cannot optimize models.

ChatGPT is a revolutionary product and can be a useful tool in the investment process by teaching the users financial literacy, giving suggestions on where to start, how to create a first investment portfolio, or helping the professionals to be more efficient with existing tasks and strategies, but it for sure cannot make the whole job instead of you or replace creative thinking and decision making.

Tetyana Kohansal ist Finanz-und Versicherungsmathematikerin und Managing Partnerin bei ks actuaries. Ihr Credo: foster young leadership in future mathematics. Sie ist spezialisiert auf Software-Entwicklung für quantitative Lösungen im Bereich Banken und Versicherung. Darüber hinaus beschäftigt sich Tetyana mit Machine Learning Algorithmen in Portfolio Management und verantwortet gleichzeitig die Investing Community „investingpossible“ für junge Menschen mit dem Zweck anderen bei der Erreichung ihrer finanziellen Ziele zu unterstützen.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More