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Understanding Two Popular Topics in Investments: AI and ESG

As a financial advisor, I keep up with many topics, from market returns to economic news to investment trends. Two topics have been at the forefront of investors’ minds: Artificial Intelligence (AI) and ESG Investing.  First, let’s talk about AI and its impact on investing and the market. I certainly do not proclaim to be an expert on AI, but I will make a few conceptual notes on how it might impact markets. What is Generative AI?  This technology has made great strides over the past several years. It involves the use of algorithms and machine learning to create content. One of the most notable benefits of generative AI in investing is its ability to process vast amounts of data quickly and accurately. In the financial world, access to real-time information is paramount. Generative AI systems can analyze news articles, financial reports, and social media sentiment at a pace far exceeding human capabilities. Markets are essentially a giant information processing mechanism. If you believe in efficient markets, you believe that fair prices will be set for securities through the more than $675 billion being traded daily in world stock market exchanges (daily average in 2022). As AI increases the speed at which information is processed, more information is incorporated into trading, and one could argue that markets become more efficient. Generative AI is new, but Artificial Intelligence has been around for quite some time and has been used in portfolio management to process information and make management more efficient. Humans have not been successful in predicting the direction or outcomes of the stock market. AI is also likely to need help in doing so. Generative AI will likely disrupt some industries and have an impact on the labor market. Still, analysts expect it will be a net positive for economic and job growth. Of course, there is much more to understand, and I look forward to tracking how AI is incorporated into the investment industry to better serve clients. Next, let’s talk about ESG, a charged and often misunderstood topic. You’ve likely heard of ESG Investing. ESG stands for “Environmental, Social, Governance,” meaning an investment or product with some sort of goal to address one or more topics.  I want to take a step back and provide a broader picture of what I will call Values Driven Investing. Suppose you have donated to a charity or chosen to shop at a small local business instead of ordering from Amazon. In that case, you are a values-driven investor, not in the sense of the stock market but in the sense of funneling your capital toward something you believe in. “Socially Responsible Investing,” or SRI, goes back thousands of years to the Quakers refusing to participate in the slave trade.  You can think about values-driven investing as existing on a continuum, with some investors focusing on financial outcomes first, with values-driven outcomes secondary and continuing on to values-driven outcomes being considered first (or solely, in the case of philanthropy.) While there are many different opinions on what values to consider when investing, it is important to remember that there are multiple ways to “vote with your pocketbook.” How can you implement values-driven investing in your financial portfolio? You can start by asking yourself a few questions: What are my goals, and am I on track to meet them?  What do I want and need in terms of financial returns?  What are my values?  Which do I want to prioritize in my portfolio? Social outcomes and personal values or financial return? It is important to note that there are many arguments about values-driven investing (ESG, SRI, Impact) and whether these themed investments are poised for higher or lower returns. There isn’t clear proof either way, so if you take a values-driven approach, make sure that you stay true to sound investment principles, like diversifying your portfolio, keeping costs low, and taking a long-term view. 

Humans have not been successful in predicting the direction or outcomes of the stock market. AI is also likely to need help in doing so.

While there are many different opinions on what values to consider when investing, it is important to remember that there are multiple ways to “vote with your pocketbook.”

Investment advisory services offered through Navigate Wealth Management, an SEC-registered investment advisor able to conduct advisory business in states where it is registered, exempt, or excluded from registration. Navigate Wealth Management also markets investment advisory services under the name Abeona Wealth.  Content contained herein should not be construed as an offer or solicitation for investment advice or for the purchase or sale of any security, insurance, or other investment product.  Investments involve risk including the potential for loss of principal.  Consult with a qualified advisor, accounting, tax, or legal professional before implementing any ideas or strategies discussed here.

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