How to Harness the Growth of AI While Managing the Risks – MoneySense

The tech sector has seen significant volatility lately as speculation mounts over whether an AI bubble is bubbling after a major rally. For young investors looking to get a piece of the action, experts say, with the right strategy it’s possible to get in on the action without risking it all.

Align AI investments with risk tolerance and objectives

Dhanji said he usually starts with the basics: assessing his client’s risk profile and financial objectives. “Not everyone can tolerate the risks of AI companies because they are more volatile,” says Dhanji.

Investing in AI no longer has to mean owning shares of major tech companies. Nvidia, Meta Platforms and AMD, among others, have been seen as proxies for the AI ​​sector in recent years, but they are not the only options. Companies across the board have now bet huge sums of money on AI and its productivity promises.

If the client’s goals are long-term, such as retirement savings, having some exposure to AI in their portfolio can complement other asset classes, Dhanji said. The volatility of AI stocks makes them unsuitable for short-term financial goals. For example, if you’re saving money to start a business or buy a house, it’s better to keep AI stocks out of the mix.

Another risk, he said, is that technology is evolving so quickly that what you own now could be outdated in a year. “You have to be careful about what you invest in,” Dhanji said.

Balanced approach recommended for investing in AI stocks

Most investors Ryan Lee hears from are aware of the volatility, but still want to buy. Lee, a certified financial planner and founder of Twain Financial, said choosing individual AI stocks to invest in can be an “overly risky” move. He also said it’s important to keep in mind how these AI stocks fit into your long-term investment strategy.

Certain index funds in your portfolio may already have exposure to AI companies, such as an exchange-traded fund (ETF) that tracks the Nasdaq. “If you hold a diversified portfolio, you already have exposure,” he said.

Lee said it’s hard to ignore AI stocks these days. “There is AI in the future… and there will be growth,” Lee said. “But we just don’t know when that growth will happen and whether or not that growth will be higher than in other sectors.”

Instead of picking individual stocks, some investors might look at AI-focused ETFs, but Dhanji warned against over-concentration. If a young investor has a long-term horizon, Dhanji recommends that 10% to 15% of his portfolio can be allocated to the AI ​​sector. But if the investor is more conservative, Dhanji suggested limiting their AI exposure to 5% of the portfolio – or not holding any AI ETFs or stocks at all if that money will be needed in the next three years or so.

Whatever the financial goal and time horizon, Dhanji recommended avoiding AI names that are buzzy recommendations on social media. “My advice is to avoid the hype train,” Dhanji said. “I’d rather people focus on the companies themselves and making sure they have strong balance sheets and cash flows.”

Dhanji said investing in quality companies with strong balance sheets will help your portfolio weather extreme swings in the market in the long run, should the AI ​​bubble burst. “My recommendation is to have that financial plan in place, know what your cash flows look like, and instead of investing a lump sum all at once and timing the market, you can then average the dollars to the market over time,” he said.

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