Can AI Be Trusted To Make Money In Stock Market? Pros and Cons
Can you trust AI to help you make profitable stock picks? As generative AI grows in competency and popularity, more people look to platforms like ChatGPT, Claude, and Grok to make and manage money. But can these apps help you invest in the stock market and make a profit?
Younger generations, including college students at Northern Kentucky University, are already using ChatGPT and other AI platforms to help manage their money. According to a recent survey of students, 69% have used AI tools for financial advice without consulting a human.
8-in-10 (83%) students polled said they use ChatGPT to help manage their money. Fewer than one-third (29%) said they followed AI-generated financial advice that they ended up regretting.
With that in mind, why not use AI to help manage stock investments? Here are some pros and cons.
Pros
- Free or low-cost; you don’t have to pay a financial advisor
- Easily accessible; no minimum investment required
- Streamlines research
- Can provide data-driven insights
- Studies show ChatGPT picks have exceeded average S&P 500 returns in the short term
Cons
- Lacks the specialized data and programming of robo-advisors
- You still have to execute the moves within an investing app or through a financial advisor
- Generative AI can be wrong
- Getting good output from gen AI relies on a good prompt
- Lacks real-time market data without integrations
Pros
Let’s explore the benefits of using generative AI tools to help you manage your stock portfolio.
GenAI apps are free or low-cost
A monthly subscription to ChatGPT ranges from free to $100 per month, with GPT Go at $8/month delivering most of the features people could want for stock investing guidance. Claude by Anthropic has a robust feature-set on a free plan.
For traditional financial advisors there are a variety of fee structure options, including:
Fee-only financial advisors can cost 0.25%. A robo-advisor can charge up to 1%+. A human advisor's fee is usually based on your assets under management (AUM). Commission-based advisors may charge 3% to 6% of each investment transaction.
If you combine ChatGPT or Claude with a free investment platform like Robinhood, with no trading fees, you can manage your stock portfolio for pennies a day, with no minimum investment.
Easily accessible, no minimum investments
According to SmartAsset.com, many financial advisors will only work with you if you have minimum assets of $25,000 or more, with $100,000 as a baseline being more common.
Retail investors can use ChatGPT or other AI chatbots as a starting point to learn the basics of the stock market and how to create a diversified portfolio. You can also use it to collect easily digestible information from earning reports and market signals. It can save time when you’re researching different companies.
Can provide data-driven insights
If you’re looking for ChatGPT or any other AI solution to analyze recent stock performance and spot patterns, that’s something generative AI has been trained to do very well. With access to the open Web, ChatGPT, Claude and Grok can share historical analysis and publicly available data, along with analyzing current market sentiment surrounding publicly traded companies.
You’ll need ChatGPT Plus or Pro for live data from ChatGPT, while the free versions of Claude, Gemini and Grok can access the web.
Studies show ChatGPT picks have exceeded human-picked portfolios
Several experiments over the last few years have shown ChatGPT’s hypothetical investments outperformed fund manager picks and the S&P 500.
In one study, ChatGPT created a portfolio of 38 stocks, pitted against 10 leading investment funds. The stocks gained 4.9% over two weeks, while the funds lost 0.8%.
In a more recent experiment, YouTuber Marko of Marko’s Trading Journey did a 30-day investment challenge against ChatGPT. Marko’s portfolio gained 0.58% compared to ChatGPT’s 8.96%.
Hedge fund manager Alphesh B. Patel did a similar experiment, using ChatGPT to choose NYSE and Nasdaq stocks “using solid financial logic and carefully designed prompts,” he said in a LinkedIn post.
The result? ChatGPT’s portfolio returned 23.2%, way ahead of the S&P 500 average, and above Patel’s own fund, which earned 20.5%.
Short answer: Yes, a properly prompted AI can make money in the stock market as well as a human advisor.
Cons
Whenever you’re using generative AI, human oversight and common sense remains important. “AI can filter data and offer ideas, but you make the final call,” Patel shared in his LinkedIn post.
Keep in mind the following drawbacks to using AI to make money in the stock market.
Lacks the specialized data and programming of robo-advisors
Many trading platforms today come with robo-advising options. Robo-advisors have access to real-time data and can execute trades automatically. They can also fully manage your portfolio, including using tactics like dollar-cost averaging and tax-loss harvesting. If you’re looking for more of a “full-service” investment platform, a robo-advisor might be worth considering over AI.
You still have to execute ChatGPTs suggestions
ChatGPT cannot execute stock trades, so you’ll still need to use an investment platform, which may have a monthly or per-trade cost.
Generative AI can be wrong
Generative AI platforms still tend to hallucinate, make up information, or even get the math wrong. Always double check AI recommendations against a calculator and your gut instincts. Does a trade make sense? Is the data accurate?
Getting good output from gen AI relies on a good prompt
You can use ChatGPT or another generative AI platform to help you understand a company and even analyze your risk tolerance. But you have to give it complete, helpful prompts.
“Prompt quality is everything,” Patel wrote. “If you ask the wrong question or provide poor data, you’ll get bad results.”
Pro tip: You can ask ChatGPT or Claude to write a prompt for you – just be sure to outline your objective clearly. The AI will tell you what information you need to share to get realistic, actionable insights.
Lacks real-time market data
Generative AI platforms can search the web, but they don’t always have access to real-time trading insights that you’d get from specialized investment software or apps.
For real-time data, you’ll want to use a plug-in that gets to-the-minute data, even before it hits the search engines or aggregators like Yahoo Finance.
Earning Money in the Stock Market Comes Down to Knowing the Fundamentals
For years people have tried to find ways to beat the stock market’s average annual return of roughly 10%. Stock market returns have hovered around 10%, with inflation-adjusted returns at roughly 6% to 7%, for nearly a century. Of course, some years stock market gains exceed 12% and on rare occasions, returns are a lot lower.
To make smart investing decisions, it’s important to understand your own risk tolerance.
How long can you keep that money tied up in stocks?Can you afford to lose it?Do you have time to recover if the stock market dips or falls?
You should also make it a point to learn the fundamentals of the companies you’re investing in. As Warren Buffett has said, “Never invest in a business you cannot understand.”
He often talked about an investor’s “circle of competence,” noting in a 1996 letter to Berkshire Hathaway stockholders, “You don’t have to be an expert on every company, or even many.”
But you should understand enough about a company’s operations, fundamentals, and value proposition to decide if you should invest.
With these basics in mind, you can use generative AI, a robo-advising platform tied to an investment app, a human financial advisor or even tackle the stock market on your own. It comes down to gathering information, using time-tested stock market strategies, and never investing more than you can afford to lose.
Other Articles of Interest:
Make sure to check out other great articles about money management and ways to save, including:
20 Ways To Save Money As Part Of Your Daily Routine
How To Create and Stick to A Budget When Money Is Tight
Sneaky Pricing Tricks Companies Use on You
Sources:
https://www.nerdwallet.com/investing/learn/average-stock-market-return
https://www.nerdwallet.com/financial-advisors/learn/how-much-does-a-financial-advisor-cost
https://smartasset.com/financial-advisor/the-minimum-investment-for-a-financial-advisor
https://www.youtube.com/watch?v=BougQAMldsM
https://youtu.be/riDb57zuapA?si=5kxsv8pUX80eSd12
https://www.investopedia.com/experts-reveal-the-most-important-investing-skill-11861064
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