AI Investment Management 101: The Definitive Guide

The world of investing is remarkably developed—with specific lingo and practices, it’s a culture all its own. This has led many new investors to consider robo-advisors and other AI investment management options, which they see as taking on the learning curve for them. 

In truth, there is still much to know about AI investment and certainly with AI investment platforms, which are the main user interface used to execute your investment strategy. These challenges often surprise new investors who sign up, leaving them looking for information on investment strategies and risk factors involved in AI investment management. 

This page offers the definitive guide to AI investment management: what it is, why it works, and what you should look out for when considering your investment platform.

What Is AI Investing?

AI investing refers to the use of machine learning to identify historical patterns in financial markets and create responding trade strategies. The process is also known as “algorithmic trading,” “quantitative investing,” or even “robo-investing,” but these variations are different monikers for the same basic concept—the use of AI technology to buy/sell stocks. 

AI investing differentiates itself from traditional investment methods, which rely on a great deal of human labor to generate strategies. In most cases, this was done by firms assigning individual stocks or indexes to a specialized financial advisor, whose job it was to study the ups and downs of that stock and create predictions according to the patterns they recognized. 

This strategy takes a great deal of time and effort as understanding even a single stock requires decades of knowledge of data and the analytical know-how to identify valuable patterns in that data.

How Is AI Used in Investments?

AI investing relies on machine learning, in which quantitative scientists (also known as quants) develop complex equations to achieve certain goals known as algorithms. The equations developed for financial markets are exceedingly complex, but a simple version might look like “short trade when stock X gaps down.” These rules determine the end actions of the AI; so long as another rule is not put in that might contradict it, the AI will always short when stock x gaps down.

Once the rules of the algorithm are clearly established, quantitative scientists then begin feeding the algorithm mountains of data culminated from decades of market information across multiple financial sectors. This data includes multiple asset classes, major world events, and even corporate events such as mergers, Acquisitions, or buyouts. the algorithm then sorts this information into:

High-value information

Which it deems useful.

Low-value information

Which it deems useless and promptly discards.

Of course, today’s market will likely be remarkably different from the market 20 years from now. This is why quants take great efforts to monitor the development of these algorithms and adjust them accordingly. Using this intuitive review process, AI investing ensures you have the most up-to-date and accurate trading strategies available. 

How Does AI Support Investment Management?

A successful investment management strategy requires a working knowledge of the market and how best to manipulate it to maximize your profits. Most traders struggle with this challenge because they have so much at stake—retirement, education, or just getting the bills paid on time. The point is you have an attachment to that money. That attachment can often lead investors to make rash decisions with their investment strategy that are based in human emotion (fear, anger, uncertainty, etc.). 

Decisions made this way often are not made responsibly. It’s very common with any investment strategy that you will have to accept some level of risk for the investments that you make. AI investment manages this challenge by handing over the reins to an emotionless unbiased machine that simply operates depending on how the market works. In this way, AI investment offers investors a more stable platform upon which to execute a winning investment strategy. 

Not only does AI execute trades with more consistency than humans do, but it also understands the market better than we do. The advancements that come hand-in-hand with machine learning culminate in an algorithm that is able to process massive amounts of data that would take an individual their entire life to understand. In this sense, AI provides investors with both sides of the coin; they provide the information necessary to make informed trading decisions and the tools to follow through on those decisions with precision.

Advantages and Disadvantages of AI Investment Management

As is the case with any other investment strategy, AI investment carries with it some degree of risk. That being said, the ease of use that is inherent with AI investing platforms has led many new investors to question whether or not AI investing is right for them. The first question often on their minds is “what does AI bring to the investment table?”

The answer is that AI investing comes with several distinct advantages and disadvantages, which may or may not appeal to you depending on what kind of investor you are. These include: 

 

AdvantagesDisadvantages
  • Processes data faster than is capable by human means 
  • Unbiased market analysis
  • Unlimited trading endurance
  • Ease of use 
  • Deep risk analysis
  • Lack of knowledge about the investor 
  • Common lack of customization options, although this depends on the platform
  • Index-heavy portfolios sometimes minimize profits

 

It’s worth pointing out that many of the disadvantages are not a universal denouncement of AI investing as a general practice. More so, it is often the case that the efficiency of your investment strategy is deeply affected by the investment platform you choose. For example, many robo advisors lack the customization options found in higher-level investment platforms like brokerage firms or hybrid solutions, like RIMAR Capital

Finding the right investment strategy requires an understanding of what kind of an investor you are. The best way to do that is to speak with an experienced consultant, which we offer at RIMAR Capital.

Understanding Your Capacity for Risk

Most investors out there find themselves falling into one of two categories: 

  • High Risk, High Reward: Investors looking to maximize their profits and are willing to take on whatever risk that involves. These are typically individuals with a bit more to spend/potentially lose. 
  • Low Risk, Low Reward: Investors looking for minimal returns, typically over a long period of time. These might include younger investors looking to start preparing for retirement in their old age.

One of the widely true disadvantages of AI listed in the table in the section above is that AIs are inherently impersonal; they can often tell you when the market is ready for investment, but they can rarely tell you when you are. Investors come from all different walks of life and face different kinds of challenges. Before starting with any AI investment (or any investment in general, for that matter) it’s important to understand which of these categories you fall into and what level of risk you are ready to take on.

Depending on your answer, you may be ready to consider different kinds of strategies. For example, someone with a bit more disposable income who’s prepared to have investments locked away for a while may want to consider a heavier investment in a riskier stock. Meanwhile, investors who lack these initial funds should start by looking at a more diverse portfolio consisting of more index funds (a wide-ranging fund consisting of multiple stalks designed to mitigate losses in the event of a market downturn). 

Whatever you decide to go with, there will be different platform options for you to weigh before you get started. 

Different AI Investment Management Platforms

The type of investor you are greatly impacts what kind of platform you may be looking to use. Although there are sometimes hybrid options that don’t neatly fall into the categories listed below, the general landscape of different investment platforms falls into one of these four categories:

Hedge Funds

Pooled investor funds specializing in high-risk strategies to maximize profits. These are often prohibitively expensive to buy into.

Mutual Funds

A professionally managed investment pool, often specializing in diversified holdings.

Brokerage Firms

Third-party entities that facilitate trades between buyers and markets on their behalf. Occasionally offer financial guidance depending on the quality of the house.

Robo-Traders

Widely accessible online platforms (typically lacking human consultation) using algorithmic trading technology.

For most new investors, it’s more than likely that you’ll fall into the two latter categories; mutual funds and especially hedge funds require an exceptionally large income (the minimum buy-in at your typical hedge fund starts at $100,000, for context) and an even larger net worth to even become members. 

This often leads new investors to consider robo-traders such as Wealthfront or E-Trade as first step options. Although these are more accessible platforms, robo traders often lack the customization options found in higher-level platforms. In addition, their focus on index heavy strategies typically yields minimal returns characteristic of a weak AI investment strategy.

For that reason, investors may want to consider stronger options.

Finding the Right Partner for You

For many investors considering the right AI investment management choice, the best option is often to speak with an expert. Robo advisors claim to have these services in the form of short surveys you take before you start investing with them, but no survey will be able to truly understand your financial situation as well as another human being. For this reason, we recommend reviewing your options before making any final decisions. 

 

For investors interested in taking your strategy into your own hands, we recommend the following articles discussing AI investment management: 

For those looking for more of a personal touch, we suggest speaking to an expert before doing anything else. At RIMAR Capital, we combine the unbiased analysis of AI with the guidance of a seasoned financial advisor. Our strategies are geared toward customers of every risk level, whether you are looking to plan for your retirement or take short-term risks with your money. Contact us if you want to learn more about how we can help you on your investment journey.