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Published: Apr 10, 2024 11 min read

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photo illustration of AI picking stocks
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Most investors can’t beat the market, but that doesn’t stop them from trying. Humans are driven by fear and greed, which can lead to impulsive and often subpar investment decisions. So it’s no surprise that some are now turning to artificial intelligence for help.

The latest use case for AI, which is being marketed to both retail and institutional investors by companies like Danelfin and Boosted.ai, embraces the technology to sift through heaps of data in order to pick stocks so humans don’t have to.

Some of these companies claim their AI-powered platforms are capable of outperforming the S&P 500, which is an impressive feat given novice and professional traders’ inability to do so. However, results have been mixed so far, and the risks of using AI to help pick stocks are often similar to the risks inherent in other short-term or speculative investment strategies.

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Even stock pros rarely beat the market

Because the average person isn’t equipped with an understanding of financial statements, technical analysis or how macrotrends affect sector performance, picking stocks can be a risky endeavor. That’s why Warren Buffett advocates for passive investors to buy shares of index funds like the SPDR S&P 500 ETF Trust, which has averaged a 10.54% annual return over the past 30 years.

Failing to beat the market isn’t specific to retail investors, though. A 2020 study conducted by S&P Dow Jones Indices compared actively managed funds to the performance of the S&P 500, finding that 89% of fund managers failed to beat the benchmark index.

More recently, BNP Paribas found that in 2023, hedge funds returned an average of 6.67% as the S&P 500 returned 24%. This, to some extent, explains the resurgent popularity of index funds among retail investors and hedge fund managers alike.

And while set-it-and-forget-it alternatives like robo-advisors have demonstrated some success, even their algorithms cannot compete with the average annual returns of the S&P 500.