Artificial Intelligence – An Incomplete Plan

I grew up in the 1980’s, which I believe was one of the best times to be a teenager. We had the best music, hands-down. MTV actually played music back in those days. Don’t even get me started on mixed tapes! Of course, we also had the Columbia House record and tape membership to keep the new music coming every month. We also had great Saturday morning cartoons and were the first generation to play video games at home.

My girls roll their eyes when I reminisce about the “good old days”. Sometimes I can see them visibly cringe. But I don’t mind, I’m sure they will experience the same nostalgia when they grow up and start families, and their kids will give them a taste of their own medicine. And I do remind them that a lot of their playlists include, Bon Jovi, U2, Journey, Guns and Roses, and even some Johnny Cash has made it to Maeve’s top ten.

Don’t get me wrong, though – I also appreciate the conveniences of modern technology. For example, when I first used an ATM to get cash instead of standing in a long line at the bank to approach a live teller, I was thrilled. Then came home phones that were not tethered to the wall, and next came cell phones. I was an early adopter of numerous technological advances because I saw their value in saving time and making life easier. People smarter than me continue to introduce new technologies every day. Even in my practice, technology helps me to help clients create sound retirement systems. A system that was not available years ago due to technology. And while I am open to new ideas, not all of them pass the smell test.

For example, take Artificial Intelligence, or “AI” as it’s called. In theory, it’s an amazing concept that has the potential to improve lives in so many ways. But what about its use in the investment world? Is it the latest and greatest idea for revolutionizing the financial world? I say no, for a variety of reasons. And this week I’d like to dig a little deeper into AI’s benefits as well as its drawback when it comes to your finances.

Let’s start by defining AI. Artificial Intelligence is a method of making a computer, a computer-controlled robot, or a software think intelligently like the human mind. While it was initially founded back in the 1950’, it has just recently gained interest and funding to consider practical uses of it. One subset of AI is called “machine learning” which is focused on building computer systems that learn from data, enabling software to improve its performance over time.

In the investment world, AI is used in several ways. AI leverages vast amounts of data and sophisticated algorithms to help investors make better investment decisions and potentially more stable returns. By utilizing machine learning algorithms, AI systems can uncover patterns and relationships that may be difficult for human investors to identify. This enables you to make more informed and data-driven decisions.

It’s not uncommon for retail investors to make bad decisions when they react with emotion, especially during volatile markets, and this can translate into significant long-term financial losses. AI systems are not susceptible to emotion or cognitive biases and can provide more objective recommendations. However, there are risks to consider. For example, an overreliance on AI models without human oversight can lead to unexpected results. AI systems are not infallible and can make errors or produce flawed predictions if not properly calibrated or trained on high-quality data.

There is also the risk that AI algorithms could be programmed to make unethical or illegal trades. In addition, there is a risk that AI algorithms could be vulnerable to hacking or other forms of cyber-attack, which could result in significant financial losses for investors.

But what I feel AI lacks the most in the financial world is the human element to investing and preparing for retirement. Investment advice is just a small part of a complete financial system. AI solutions don’t come close to providing the full range of services that human financial advisors offer. As people move through life, their priorities and financial goals evolve. Great human financial advisors are able to create nuanced investment strategies that take into account changing life circumstances.

Preparing for retirement requires a comprehensive and customized system that just incorporating AI doesn’t offer. It includes not only making smart investments but also factoring in inflation, taxes, lifetime income strategies, healthcare funding, and much more. And because money is an emotional matter, you need a human financial advisor to offer emotional guidance and help you develop positive budgeting and wealth management habits that lead to long-term financial security. When markets decline or experience an upset, a financial advisor can be there to help you make rational financial decisions and overcome detrimental emotions or impulses.

Despite these concerns, the impact of AI on the stock market will likely be significant in the coming years. While there are still some uncertainties about the technology, AI has the potential to bring about many benefits for investors. Folks, while it is important for you to be aware of the potential risks associated with AI and to use the technology carefully. I believe this is just another reason to incorporate a downside risk mitigation system based on quantatitive data to help design and deploy a comprehensive system that addresses all of the crucial components of a successful retirement.

And as always - be vigilant and stay alert, because you deserve more! I hope everyone had a great Thanksgiving.

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.