As with any underdeveloped technology, artificial intelligence (AI) is an investment option that offers high potential returns as well as plenty of risks. It’s easy to get swept up in the moment and jump on the AI bandwagon. That might be a recipe for short-term success (if you time your buy-in right), but given enough time, it will ultimately lead to failure.
If you want your AI investing to pay off over the long term, you need to have a solid understanding of your options before allocating any of your resources. You want to study the industry, your investment avenues and key considerations such as illiquidity and creditworthiness.
Let’s explore the unfolding world of AI and how to make informed decisions as you invest through mutual funds, exchange-traded funds (ETFs) and individual companies.
Recognizing AI's investment allure
Let’s start with the obvious: AI is exciting. Its allure is drawing billions of investment dollars — and with good reason. AI is the real deal. AI is rapidly transforming industries, and the investment world is no exception.
In my time working at the Fintech Finance Group, we’ve never seen an industry-changing technology with quite this degree of potential. From composing text and making personal suggestions to driving the Fourth Industrial Revolution, this technology is touching every part of life as we know it.
As an investor, it’s easy to see how this exciting new frontier offers significant potential returns. As AI technology continues to disrupt markets, its near-limitless utility means it may be a good time to invest in this growing area.
With that said, investors should remember that AI is a relatively young field — and as is the case with any fledgling market, there are inherent risks involved. That means you want to make informed investments, maintain exit strategies and remember to stay diversified.
Considering AI investing avenues
Believe it or not, Nvidia (NVDA) isn’t the only AI company out there. I kid, but I hope you see the point. There are multiple ways you can gain exposure to AI’s profit potential in your investment portfolio, and at this point, many of these alternatives may have more upside than Nvidia and its bloated market value.
The obvious avenue here is to invest directly in publicly traded companies. Yes, Nvidia is one of these. But there are many other AI-focused brands, such as Microsoft (MSFT), Alteryx (AYX) and Palantir (PLTR), that are applying bleeding-edge AI technology in a variety of industries and functions.
In theory, each of these has the potential for high returns. However, you want to conduct in-depth research with every company to understand their market position and what sets their technology apart. Consider how established they are and how each company’s risk level affects your portfolio’s overall stability.
You can also invest in AI using ETFs and mutual funds. These represent collections of AI-related companies, naturally spreading out both risk and reward. This provides a lower barrier to entry for investors with less capital and can make it easier to “set and forget” your artificial intelligence investments for the long term.
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Going beyond the headlines
Along with each individual investment channel, you want to consider the nuances of AI investing currently. For example, illiquidity is particularly relevant to private company investing.
How easily can you sell the shares of each AI company that you invest in? If they’re publicly traded, this could be no issue. If you’re an angel investor or venture capitalist getting in on the action early, though, you may have a tougher time exiting a position.
You also want to evaluate creditworthiness if you’re directly loaning money to AI startups and smaller companies. Is there a clear timeline for the borrower to eventually repay the loan (with all due interest)?
Making informed decisions
If you want to invest in AI successfully, you must grasp both the potential reward and the inherent risk that comes with each opportunity. Do your research. Stay aware of your risk tolerance. Make sure your portfolio stays diversified. Keep your investment goals top of mind.
If you find your portfolio is lopsided, or you aren’t sure about the risk-reward of an AI investment opportunity, remember to consult with a qualified financial adviser. They can provide insights that are particularly invaluable when you are venturing into new investment territories such as the promising but precarious AI revolution.
