August 22, 2023

Can Artificial Intelligence (AI) Outperform the Market?

Can artificial intelligence (AI) be leveraged to outguess and outperform the market? In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan explores how AI is being utilized in the financial realm and why we do not recommend it as an investment strategy.


Kevin Grogan: In today's video, I wanted to answer a common question we've been getting over the course of this year, which is can artificial intelligence be used to outperform the market? And it's understandable. This has been a common question here lately with all of the news media attention towards artificial intelligence tools. I think one thing that might be a bit surprising to folks is that this artificial intelligence technology has actually been around for a few years now. And while certainly not as high powered as what we've seen with Chat GPT and other tools that have come into the public sphere here in recent months, there has been the ability for artificial intelligence to quickly process financial reports, economic data and even gauge sentiment and company earnings calls now for about five or six years. So this is not a brand-new technology. It's been around for a little while now.

Historical Results of AI Investment Strategies

Kevin Grogan: And what we can do is look back at investment strategies that have attempted to leverage this artificial intelligence technology to try to outperform the market and see what the results actually have been over the past five or six years. So the slide that you're looking at on your screen now looks at the performance of an AI Powered Equity ETF since its inception relative to the broad U.S. market. And what we see over this stretch of time is that the market as a whole outperformed this AI Powered Equity ETF by a pretty wide margin since its inception.

Market Patterns Are Constantly Changing

Kevin Grogan: And so I think there's a few different reasons for why we've seen the broader market outperform. I'd say first, it's kind of related to the AI technology itself. So in general, AI does really well in making predictions and areas where the patterns are stable over time, and that doesn't really describe how markets work. Markets are very dynamic, very complex, and the relationships between different investments in between different asset classes changes over time. So if you're making decisions based off of historical patterns, those patterns are constantly changing. So that makes using AI to try to outperform the market somewhat fraught to begin with because again, those patterns change over time.

It’s Difficult to Outguess the Collective Wisdom of Markets

Kevin Grogan: I think the second reason not specifically related to AI, but really this applies to any kind of strategy that attempts to outperform the market is that it's just very, very difficult to outguess the collective wisdom of markets themselves. So markets are always incorporating the latest available information, and that is getting baked into prices. And that makes it very, very challenging for any active manager, whatever the strategy that they're attempting to employ to outperform the market and outguess where prices are going to be. Because again, the prices are set by the collective wisdom of markets. And it's hard for any single participant using any methodology to be able to out guess that collective wisdom. If you do have any questions on anything I've covered today, please don't hesitate to reach out to your advisor.

If you have any questions please feel free to drop us a note.

Source: Morningstar

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The time frame chosen because of the dates of available data. The inception of the AIEQ ETF was 2017. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. All investments involve risk, including loss of principal. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this information.

About the Author

Kevin Grogan

Chief Investment Officer

As Chief Investment Officer for Buckingham Wealth Partners, Kevin conducts investment research and writes articles on a wide range of topics, including retirement planning and investment policy. Kevin co-authored "The Only Guide You’ll Ever Need for the Right Financial Plan" with Larry Swedroe and Tiya Lim. This step-by-step handbook focuses on the art of investing by providing investors with information they can use to build a tailor-made investment strategy. Kevin holds an MBA from Saint Louis University and a bachelor’s of science in finance from Missouri State University in Springfield.

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