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Artificial Intelligence and Financial Advice

Artificial Intelligence and Financial Advice

May 02, 2024

AI Driven Financial Advice

I was playing around with Microsoft’s Bing web browser and its “Deep Search” tool dubbed “CoPilot”, which is kind of like Chat GPT built into a browser.  Ask it a question, it scours the internet, and comes back with its best answer.   The resulting advice is a mixed bag. 

Is it wise to sell stocks when the market falls? 

"When the stock market falls, consider the following options123:

Hold onto your investments: Historically, the stock market has always recovered from downturns.

Avoid panic selling: Selling during a market downturn may lock in losses.

Consider buying additional shares: Low-priced stocks may eventually recover and yield significant gains."

 

That is generally good advice.  But then I asked:  Should I sell stocks when the market is near all time highs? 

This time it gave me a lengthy answer full of technical trading advice such as looking at charts, gauging volume vs price movements, etc.  In essence, in the age-old debate of “buy and hold” vs. “timing the market” – the program sided firmly with market timers.  Truth is, this is terrible advice for the average investor when it comes to her own retirement money.  Furthermore, research has demonstrated clearly that timing the market does not add value, and only increases the risk of bad outcomes.  In fact, if the advice provided were true, then AI powered trading tools would be able to make traders rich by telling them when to get in and out of the market.  And that has never happened – and never will, since many traders acting on the same information at the same time will negate any advantage provided by AI tools. 

I tried another age old question:  Should I buy my car or lease?  Here is what it told me:

"The decision between buying and leasing a car involves several factors. Let’s explore the pros and cons of each option: 

Buying a Car:

Ownership: When you buy a car, you become the owner. You build equity over time as you make monthly payments, and at the end of the loan term, the car is entirely yours.

Flexibility: You have the freedom to modify or personalize the car as you wish.

Cost: While monthly payments may be higher, you eventually own the asset.

Long-Term Investment: Buying is ideal if you plan to keep the car for an extended period.

Leasing a Car:

Lower Monthly Payments: Leasing typically involves lower monthly payments because you’re not paying back the principal. Instead, you’re covering the difference between the car’s initial value and its expected value at the end of the lease.

Driving a New Car: Leasing allows you to drive a new car that might be more expensive than what you could afford to buy.

Predictable Costs: Leases often include warranty coverage, reducing the risk of unexpected repair expenses.

Mileage Restrictions: Leases come with mileage limits, so consider your driving habits.

No Ownership: At the end of the lease, you return the car. You don’t build equity or own the asset.

Considerations:

Leasing: If you prioritize lower monthly costs and enjoy driving a new car, leasing may be a good fit.

Buying: If long-term ownership, customization, and building equity matter to you, buying is the better choice.

Ultimately, the decision depends on your personal preferences, financial situation, and how long you plan to keep the car."

 

So that was a pretty good answer, I thought, of weighing the pros and cons.  My ex business partner Luba and I were always on opposite sides of this debate.  She valued driving new cars that were under warranty.  I always figure the best car is one that doesn’t have a financial liability attached to it.  Different strokes for different folks. 

But, I thought, CoPilot assumes I am going to borrow money to buy the car.  Suppose I was going to pay cash.  So I asked CoPilot “What if I have the cash to buy the car outright?”.  Here is the answer it gave me:

Copilot:

If you have the funds to purchase a car outright without taking a loan, that’s a fortunate position to be in! Here are some considerations:

Immediate Ownership: Buying the car outright means you’ll own it immediately. No monthly payments or interest charges—just the joy of driving your new vehicle.

Financial Impact:

Opportunity Cost: Consider the opportunity cost of using that money to buy the car. Could it be better invested elsewhere, such as in stocks, real estate, or other assets?

Cash Flow: While paying upfront avoids interest, it also reduces your cash reserves. Ensure you have enough liquidity for emergencies and other financial goals.

Depreciation:

Cars depreciate over time. When you buy, you bear the full brunt of this depreciation. However, if you plan to keep the car for many years, this may not be a significant concern.

Insurance and Taxes:

Owning a car outright affects insurance costs and taxes. You won’t need comprehensive coverage required by lenders, but you’ll still need liability insurance.

Property taxes (if applicable) may also vary based on ownership.

Resale Value:

If you plan to sell the car eventually, consider how its value will change over time. Some cars hold their value better than others.

Peace of Mind:

Owning a car outright provides peace of mind. No debt, no monthly payments—just the satisfaction of having your own wheels.

Remember to weigh these factors against your financial goals and lifestyle. Whether you choose to buy outright or finance, make an informed decision that aligns with your needs and preferences.


Conclusion:

Remember AI search engines rely on the information they can find on the internet.  Therefore, results should always be viewed with some suspicion. However, if you are looking for an efficient and concise summary of a topic, these tools are very effective and easy to use.  I just wouldn’t bet my life savings based on the information provided.  Fortunately for folks like me, experience, nuance, and personal touch still matter when it comes to financial advice.