As a young investor myself, I understand the appeal of do-it-yourself investing. We are used to having information at the click of a button. Today you can open an investment account from your phone, buy an ETF in minutes, compare fees online and ask AI to explain anything from asset allocation to offshore investing. So it’s a fair question: if I can access the investments, research the options and use AI to help me decide, why pay someone else to help me?
The answer is not that AI has no place in your financial life. It can be a genuinely useful tool for learning, researching and testing ideas. But there is a difference between having access to information and knowing how to turn it into a sound investment strategy. The real test is knowing which questions to ask, how to interpret the answers, and having the discipline to implement a strategy and stick to it.
AI is exceptionally useful as an educational tool. Investing comes with an unfortunate amount of jargon, and AI can explain concepts in plain language, letting an investor keep asking until they actually understand. It is also a capable research assistant – comparing investment philosophies, exploring the risks of concentrating in a particular sector, or building a checklist of what to weigh up between two options. Used well, it can even be turned against your own thinking: if you believe putting all your long-term savings into an S&P 500 ETF is the obvious move, ask AI to make the strongest possible case against doing so.
Where AI falls short is more interesting, and more consequential. The more knowledgeable you already are, the more useful AI becomes. An experienced investor knows what information to feed it, what assumptions to question, and when an answer doesn’t quite add up. Someone with very little experience may get an equally polished-looking response, with far less ability to spot what’s been missed.
That’s one of the biggest risks of leaning on AI to manage a strategy: you don’t know what you don’t know. Ask it to build you the perfect portfolio and, based on your age, income and risk tolerance, it can produce something that looks remarkably sophisticated. But did you tell it you don’t yet have an emergency fund? That you might buy a home in three years? Did you know to ask about the tax consequences of selling an existing investment? An experienced adviser brings something AI doesn’t: knowing which questions need to be asked in the first place.
The same blind spot shows up in fund selection. It’s easy to ask AI for a handful of popular, low-cost ETFs and end up with something that looks diversified. But owning several funds doesn’t automatically mean you are. Split your money equally between an S&P 500 ETF, a Nasdaq-focused ETF and a global technology ETF, and look beneath the labels: the same handful of mega-cap tech names turn up in all three. That matters more than it used to – the so-called Magnificent Seven now make up close to 34% of the entire S&P 500, so an investor can unknowingly make the same bet several times over through different funds, ending up with a portfolio that behaves more like a concentrated one than a diversified one. Diversification isn’t simply owning different investments – it’s understanding how those investments behave together.
The Behaviour Gap
Building the right portfolio may be the easier part. The real test comes when markets don’t behave as expected. Imagine your carefully constructed portfolio is suddenly worth 30% less than it was a few months ago, headlines are predicting further losses, and every instinct says protect what’s left.
This is where the gap between risk tolerance and risk capacity becomes clear. Risk tolerance is how comfortable you think you are with volatility; risk capacity is how much risk your circumstances can actually afford. It’s easy to say you’re comfortable with an aggressive portfolio when markets are rising, and much harder to know if that’s still true when your portfolio is down sharply – and even if you are emotionally fine with the decline, you may not have the time to wait for a recovery if that money is needed for a home deposit or an income soon.
AI can explain loss aversion and panic selling perfectly well. What it can’t judge is whether your circumstances have genuinely changed, or whether the portfolio was right for you to begin with. And it can’t stop you pressing “sell”. This is one of the less obvious functions of professional advice: an adviser acts as a barrier between an investor and an impulsive decision, not by blocking access to your money, but by creating a point where the decision has to be talked through first – sometimes talking a client out of the very decision they’re convinced will protect them.
Investments also have to eventually do something – fund a property purchase, an income, a retirement – and they carry tax consequences and interact with retirement structures and, eventually, an estate. Markets don’t behave neatly and investors don’t make decisions in a vacuum; financial planning happens in real lives, not in a theoretical world where every relevant variable has conveniently been entered into a prompt.
So should investors use AI? Absolutely – to learn, to research, to become a more informed participant in their own financial decisions. But being informed isn’t the same as having a strategy you’ll actually stick to. The better approach isn’t AI or advice, it’s AI and advice: let AI help you understand your money, and let an experienced professional help you decide what to do with it.
Written by Liza Brink CFA®, CFP®, Associate Investment Analyst at WealthStrat