Understanding How AI is Influencing Investing: What Retirees Need to Know

As you approach or enjoy retirement, ensuring your financial decisions are smart and well-informed becomes even more critical.

In recent years, artificial intelligence (AI) has become a powerful tool in the world of investing, with the potential to transform the way we manage portfolios and make decisions. However, as with any new technology, it’s important to understand both the benefits and the potential pitfalls.

This week, we’ll explore how AI is shaping the investment landscape and what retirees, in particular, should keep in mind when integrating AI-driven tools into their financial planning.

What is AI in Investing?

AI in investing refers to the use of machine learning algorithms, data analytics, and automation to assist in making financial decisions. These systems can analyse vast amounts of data in real-time, identify patterns, and make recommendations based on historical trends and predictive analytics.

AI Investment is Likely to Grow in the Next Three Years

Source: Stanford Institute and Goldman Sachs

According to Stanford Institute and Goldman Sachs, global artificial intelligence investments are projected to hit $200 billion by 2025. While this sounds like a great investment opportunity it’s important to approach AI with caution and awareness.

Many companies in the sector are currently trading at lofty valuations, driven by the excitement and future prospects of the technology. These elevated valuations can often lead to increased volatility as investor sentiment fluctuates with market trends, regulatory developments, and technological breakthroughs. While the growth potential is undeniable, it’s essential to remember that high valuations may expose investors to significant risk if companies fail to meet expectations or if market sentiment shifts. A balanced, cautious approach is key when navigating such a fast-evolving and speculative space.

Using AI for Investment Decisions

1. Robo-Advisors

Robo-advisors are automated platforms that use algorithms to build and manage your investment portfolio. These tools are designed to create a balanced portfolio based on your risk tolerance, goals, and retirement timeline. For retirees, robo-advisors can offer a low-cost, hands-off approach to managing investments.

However, it’s important to remember that while robo-advisors can streamline portfolio management, they lack the personal touch. If your financial situation is complex or requires nuanced decision-making, a human financial adviser may be better suited to provide the personalized guidance you need.

Robo-Advisory Market Size, By Provider, 2018-2028

Source: KBV Research

According to KBV Research, the robo-advisory market is forecast to reach $24bn by 2028, at a market growth of 29.9% CAGR (compound annual growth rate).

AI in Action:

Imagine Mary, a 65-year-old retiree, who opts for a robo-adviser to handle her investments. The AI-driven platform automatically rebalances her portfolio based on market conditions and her risk profile.

However, when market volatility spikes, the robo-adviser sells some higher-risk assets to minimise losses. While this aligns with her risk tolerance, Mary later realises she may have missed out on future gains had she been more patient—a subtle reminder that while AI is efficient, it lacks the human perspective to navigate unique emotional or life circumstances.

2. AI Stock and Market Predictions

AI systems can process immense amounts of data, ranging from historical stock performance to real-time news and social media sentiment, to predict market trends. This can be beneficial for retirees looking to maximise their returns, especially when combined with a diversified portfolio. AI’s ability to anticipate market changes can help you stay ahead of trends and avoid major losses.

However, relying too heavily on AI predictions can be risky. They may not always predict new risks emerging from unprecedented global events, regulatory changes, or market disruptions. These systems are only as good as the data they’re trained on, and they can sometimes fail to account for unexpected events like political crises or pandemics. For retirees, who may have less time to recover from major financial setbacks, it’s critical to not over-leverage AI predictions.

The Crystal Ball Fallacy:

Imagine a retiree, John, who begins relying on an AI tool that predicted the booming tech sector in 2021. Encouraged by previous gains, John shifted more of his retirement savings into AI-recommended tech stocks. But when the market corrected itself, John experienced losses he didn’t anticipate. AI can predict trends, but it cannot account for sudden market reversals. The key is balancing AI insights with a broader investment strategy.

3. AI-Powered Risk Management Tools

AI is particularly useful in risk management. Many financial platforms now offer AI tools that assess the risk of individual stocks, sectors, or entire portfolios. For retirees, these tools can help ensure that your portfolio is aligned with your risk tolerance, protecting you from undue losses while still providing the potential for growth. As retirees have less time to recover from market downturns, using AI as one component of a broader strategy is key.

AI vs. the Unexpected:

Joan, a retiree in her late 60s, used AI-powered tools to minimise her portfolio’s risk, and everything seemed stable. But during the onset of the COVID-19 pandemic, her portfolio took a significant hit. While AI had helped her mitigate traditional risks, it couldn’t foresee the pandemic’s impact. Joan learned that human judgment and flexibility still play vital roles in managing risk.

What Should Investors Keep in Mind?

1. Beware of Over-Reliance on Automation

While AI-driven tools can offer valuable insights and efficiencies, retirees should be careful not to become over-reliant. Blindly trusting algorithms can lead to overconfidence in their accuracy and leave your portfolio vulnerable to unforeseen risks. Just as with any financial tool, AI is most effective when used alongside human judgment and a well-thought-out strategy.

2. AI Biases and Data Limitations

AI systems rely on the data they are given. If the data is incomplete, outdated, or biased, it can lead to inaccurate predictions or recommendations. Retirees should be cautious about AI tools that offer “one-size-fits-all” solutions. Your financial situation is unique, and while AI can provide useful general insights, it might not account for your specific needs and retirement timeline.

3. The Role of Emotions and Biases

Even though AI removes some emotional decision-making from the equation, your own biases can still influence how you use these tools. For example, if you’re prone to overconfidence or loss aversion, you may misuse AI recommendations to either take too much risk or avoid it entirely. It’s important to use AI as a guide, not a definitive answer.

Applying AI to Your Retirement Strategy

1. Set Clear, AI-Informed Goals

Use AI tools to help define and stay aligned with your long-term retirement goals. However, be mindful that these tools should supplement—not replace—the comprehensive financial planning process. Adjustments should be based on a combination of AI insights and your personal situation.

2. Work with a Financial Adviser

A financial adviser can help you navigate the complexities of AI in investing, providing personalised advice that considers both the insights from AI and your specific retirement needs. Advisers can also help you avoid common pitfalls, such as overtrading or relying too heavily on AI-driven predictions.