AI is being hailed as the future of market analysis and portfolio management, but history tells us a different story. None of the previous tools, such as the HP-12C calculator, Bloomberg terminals and high-frequency trading, made markets easier to beat; they only made them more efficient. We will explore the appeal of AI in investing, the challenges it faces, and why Australian retail investors, SMSFs, and super funds should embrace index funds. 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. However, the securities markets already reflect all available information almost instantly. AI will only accelerate this process, but this doesn’t necessarily mean it will give investors an edge. Some elite hedge funds may use AI to extract short-lived trading edges, but these advantages won’t last long. 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. These costs and complexities limit the accessibility of AI to most investors, making it difficult for them to compete.
- **The Case Against Active Investing**
- Over the past 20 years, more than 80% of professional fund managers have failed to outperform their sharemarket benchmarks after fees.
- In the past five years, 98% of global fund managers have underperformed basic global share market ETFs.
Even before AI became the latest investing buzzword, active investing to beat the market was already a losing game. The evidence is clear: no matter how well-resourced, highly paid professionals with access to cutting-edge research and real-time data, cannot consistently beat the market. If this is the case, why should we expect AI-based stock-picking to be any better?
“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.”
The best bet for investors looking for long-term, reliable returns is low-cost index ETFs. AI will make it even cheaper and easier to access these funds, further eroding the case for active management. Despite the overwhelming evidence that stock-picking fails to outperform over the long run, many super funds still cling to active strategies.
- Many super funds advocate for strong action on climate risk, citing the importance of research and data-driven decision-making.
- However, when it comes to investing, many super funds ignore decades of research showing that beating the market is nearly impossible.
- **The Human Advantage: Behaviour Matters More Than Stock-Picking**
- AI can provide high-quality, evidence-based guidance to more people than ever before, driving down costs and enhancing financial planning tools.
- AI-powered tools can remind investors to stay invested during market downturns, preventing costly behavioural mistakes.
The real challenge for investors isn’t finding the next hot stock using ChatGPT – it’s managing their own behaviour. AI can help investors 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 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. By embracing AI and low-cost index funds, investors can make the most of its benefits while avoiding its pitfalls.
