Artificial intelligence has made a significant impact on the investing landscape since the introduction of ChatGPT in November 2022. Investors have shown great interest in AI-related technologies as they search for the next big winners. In 2023, the Magnificent Seven, including Tesla, Amazon, Meta Platforms, Apple, Microsoft, Alphabet, and Nvidia, played a major role in driving the market’s rally. However, in 2024, even the top performers faced challenges, with Big Tech names causing a more than 2% drop in the Nasdaq Composite.
As AI transitions from early-stage success stories to second-stage adopters, portfolio and wealth managers advise investors to consider certain strategies for long-term plays in the space. While there is no secret formula for investing in artificial intelligence stocks, investors can focus on specific metrics and trends to differentiate the winners from the underperformers. It is crucial to pay attention to details such as a company’s cash burn, spending habits, ability to work through backlogs, and investments in infrastructure. Additionally, examining government grants in industries like chip stocks can provide valuable insights into potential winners.
Financial experts emphasize the importance of diversification when building an investment portfolio, especially in the AI sector. Rather than investing in individual stocks, an exchange-traded fund (ETF) can offer diversified exposure to a range of AI-focused companies. ETFs like Global X Robotics and Artificial Intelligence ETF (BOTZ), First Trust Nasdaq AI and Robotics ETF (ROBT), and Global X Artificial Intelligence & Technology ETF (AIQ) can be less risky options for investors to gain exposure to the AI theme. By selecting ETFs with high trading volume and low fees, investors can mitigate potential risks and maximize returns.
Volatility is a common issue for investors, particularly in newer trends like artificial intelligence. While stocks may initially rise when a new theme gains popularity, they often face volatility and corrections along the way. Nvidia’s recent setback, with a 10% drop in its shares, serves as a reminder of the potential risks associated with investing in AI stocks. ETFs, on the other hand, can provide a more stable investment option by diversifying across multiple companies and sectors. While ETFs may not offer the same level of returns as individual stocks, they can help investors weather market fluctuations and reduce overall risk.
The impact of artificial intelligence on investing in 2024 is undeniable. While the AI sector presents lucrative opportunities for investors, it also comes with risks and challenges. By adopting a strategic approach, diversifying portfolios, and utilizing ETFs, investors can navigate the evolving landscape of AI investments and position themselves for long-term success.