In the ever-evolving world of technology and investments, one term has been on everyone’s lips lately: Artificial Intelligence (AI). The launch of OpenAI’s ChatGPT in late 2022 was a turning point, showcasing the immense potential of generative AI technology. As a result, AI has become the buzzword of the year, and AI stocks have been soaring. While it’s tempting to jump on the AI bandwagon by investing heavily in a single AI stock, there are compelling reasons to resist that urge.
The AI hype and Its impact
The AI hype is undeniably real. Nearly every tech company is singing the praises of AI, and investors are taking notice. AI stocks have witnessed remarkable surges in value, reminiscent of the dot-com bubble when the World Wide Web disrupted the stock market. However, as history has shown, not all tech stocks from that era survived, and only a handful emerged as true winners.
One key factor to remember is that AI is still a nascent industry, and many companies are yet to reap substantial financial rewards from their AI endeavors. Before diving headfirst into AI stocks, it’s wise to exercise caution and consider alternative approaches.
The basket approach: diversification is key
Rather than placing all your bets on a single AI stock, a more balanced strategy involves diversifying your investments within the AI sector. This can be achieved through a basket approach, which entails buying several stocks to reduce the risk associated with individual companies.
AI encompasses various subsectors, each offering distinct opportunities. Here’s one way to construct a diversified AI basket:
Semiconductor stocks: Investing in semiconductor stocks is a smart move since AI relies heavily on powerful chips. Nvidia is an obvious choice, but you could also consider Advanced Micro Devices, Broadcom, or Taiwan Semiconductor to gain exposure to semiconductor manufacturing.
Big tech: Major technology players like Microsoft and Alphabet deserve a place in your AI basket. Microsoft has partnered with OpenAI, while Alphabet has made substantial investments in AI research, including Google DeepMind and Bard.
AI-Centric businesses: Companies that have AI at the core of their business models are worth considering. Examples include Upstart in consumer loans, Lemonade in insurance, or C3.ai in application software.
An easier alternative: AI ETFs
Managing a basket of AI stocks can be complex, but there’s a simpler solution: investing in AI exchange-traded funds (ETFs). The largest AI ETF on the market is the Global X Robotics & Artificial Intelligence ETF (BOTZ), boasting net assets of $2.2 billion.
BOTZ provides diversification by holding a variety of AI-related stocks, reducing the risk of concentrating too heavily on a single company. Currently, its top holding is Nvidia, accounting for 14.1% of the ETF’s assets. Other major holdings include medical device maker Intuitive Surgical (9.7%), ABB, a Swiss automation and robotics company (8.2%), and Keyence, a Japanese firm specializing in factory automation products (6.9%).
A prudent approach to AI investment
The excitement surrounding AI is undeniable, and its transformative potential cannot be underestimated. However, it’s crucial to approach AI investments with a sense of caution and prudence. Remember the lessons from the dot-com bubble, where not all tech stocks emerged as winners.
Instead of trying to pick a single AI champion, consider diversifying your investments within the AI sector. The basket approach allows you to spread your risk across various subsectors, including semiconductors, big tech, and AI-centric businesses. Alternatively, investing in AI ETFs like BOTZ offers a simpler way to gain exposure to this dynamic industry.
In the world of AI investments, the key to success is not necessarily picking the one true winner but rather adopting a strategic and diversified approach that aligns with your financial goals and risk tolerance. By doing so, you can participate in the AI revolution while minimizing potential pitfalls along the way.
