By Chris Brycki
Every few decades, a new technology emerges that promises to revolutionise investing. In the past, innovations such as the HP-12C calculator, Bloomberg terminals and high-frequency trading were expected to give investors an edge. The latest is artificial intelligence, which is being hailed as the future of market analysis and portfolio management.
But history tells us a different story – none of these tools made markets easier to beat; they only made them more efficient. AI will follow the same path, further reinforcing why Australian retail investors, SMSFs and super funds should embrace index funds.
If highly paid professionals can’t beat the market, why should we expect AI-based stock picking to be any better?Credit: Getty
The appeal of AI in investing is obvious. Machines can process vast amounts of data, detect patterns invisible to the human eye and execute trades at lightning speed.
But securities markets already reflect all available information almost instantly and AI will only accelerate this process. Some elite hedge funds may use AI to extract short-lived trading edges, but these advantages won’t last long.
More importantly, retail investors, SMSFs and even large super funds won’t have access to them. The costs and complexity of AI-driven strategies mean any potential ‘market-beating’ alpha is quickly eroded by trading fees, infrastructure expenses, and fierce institutional competition.
Even before AI became the latest investing buzzword, active investing to beat the market was already a losing game. Over the past 20 years, more than 80 per cent of professional fund managers have failed to outperform their sharemarket benchmarks after fees.
In the past five years, the challenge has only intensified and 98 per cent of global fund managers have underperformed basic global share market ETFs.
If well-resourced, highly paid professionals with access to cutting-edge research and real-time data can’t beat the market, why should we expect AI-based stock-picking to be any better?
Super funds that ignore indexing fail their members
AI makes markets even more efficient, what should investors do? The answer is simple: embrace low-cost index ETFs.
Index investing is based on the reality that trying to pick winners is a fool’s errand. The more AI improves price discovery, the less room there is for active managers to exploit inefficiencies.
Too many careers in the super industry depend on maintaining the myth that active management benefits the end member.
AI will reinforce what we’ve known for decades: low-cost, broad-market ETFs are the best bet for investors looking for long-term, reliable returns. Moreover, AI will make it even cheaper and easier to access index funds, further eroding the case for active management.
Despite the overwhelming evidence that stock-picking fails to outperform over the long run and that it is only getting harder, most super funds still cling to active strategies. This contradiction is particularly striking given their stance on other evidence-based issues, such as climate change.
Many super funds advocate for strong action on climate risk, citing the importance of research and data-driven decision-making. But when it comes to investing, the same funds ignore decades of research showing that beating the market is nearly impossible.
If super funds are truly committed to following the science, they should apply the same standard to their investment strategies. Anything else is intellectual dishonesty. Unfortunately, too many careers in the super industry depend on maintaining the myth that active management benefits the end member.
The human advantage: behaviour matters more than stock-picking
The real challenge for investors isn’t finding the next hot stock using ChatGPT – it’s managing their own behaviour. Rather than using AI to chase elusive short-term gains, investors should use it to stick to sound financial plans and stay disciplined across market cycles. This is where AI has the most potential – to prevent costly behavioural mistakes.
AI-powered tools can remind investors to stay invested during market downturns, helping them avoid panic selling. They can reinforce the importance of long-term compounding and prevent emotional decision-making and other behavioural mistakes.
With the cost of financial advice becoming increasingly prohibitive in Australia, AI can provide high-quality, evidence-based guidance to more people than ever before.
Rather than fearing AI, retail investors should welcome it. AI will drive down costs, enhance financial planning tools and make markets more efficient.
But one thing won’t change: the smartest way to invest will still be to own a diversified portfolio of low-cost index ETFs and let compounding do the heavy lifting.
Chris Brycki is founder and CEO of online investment adviser Stockspot.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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