Investors with long memories will well remember the so-called Tech Wreck, otherwise known as the Dot Com bubble, which caused chaos in sharemarkets in early 2000. The 1990’s were a period of great excitement around the advent of the World Wide Web, as we called it then. The internet was going to revolutionise the way we did business and profits would soar as a result. Technology companies sprang up everywhere – some short-lived and others a huge success. Investors gambled on tech start-ups, thinking they could pick which ones would succeed. Indeed some investors did make a fortune. Back in 1990 you could buy shares in Apple Inc for $US0.31. Today they sell for over $US220. Between 1995 and its peak in March 2000, the NASDAQ share market index rose by 800%, only to fall to 78% of its peak value by October 2002 and thereby losing most of the gains made during the bubble.
This bubble is one of a string of bubbles that have popped up over many decades thanks to new inventions such as railroads, radios, television and computers. Bubbles are part of the fabric of the sharemarket. As we know, the sharemarket is driven by the emotions of greed and fear. In the upswings, a state of euphoria arises as investors crowd the market chasing gains. The more money invested, the higher prices rise as sought-after shares become scarce. At the top of a bubble, there is a trigger that sends the market into a downward spin. The trigger could be just about anything. It is usually news of some kind that causes nervousness amongst investors which then descends into a state of panic-selling.
Roll forward to 2024 and we observe investor enthusiasm for AI technology. It is said that AI could be one of the most transformative advances in economic history and there is no doubt that some companies adopting this technology will make super-profits. Does this mean we will see another bubble? It’s certainly something to watch out for. However, a rise in AI stocks may reflect a bull market rather than a bubble. A bubble differs from a bull market in that it is typified by irrational behaviour, such as people borrowing money to invest and novice investors entering the market in the hope of making a small fortune. A bubble is akin to a gold rush in days of old. Whatever happens with tech stocks will have a major impact on the share market as a whole, as communications and technology shares make up a significant proportion of the market and investors should therefore be wary.
It’s important to think about how real the gains from AI will be and to distinguish the ‘hype’ from the reality. This is not easily done by people who do not fully understand the technology.
The best advice for investors in these uncertain times is to stick to the two fundamental principles of investment – diversification and matching your investment strategy to your investment time frame. Investment is best done with the help of a financial adviser who can help select from a range of well researched investments to complement your portfolio and ensure you are not overly exposed to risk. The money you invest in shares should be money that you don’t need to access for ten years or so. That way, you can survive the rapid rise and fall of a bubble with your money intact.
For retirees, the best returns from AI come not so much from investment but from the application of the technology to products and services that impact on quality of life. There are plenty of potential examples – applications that help with memory and cognitive support, virtual reality experiences that enable you to travel the world from your armchair, safety applications in your home, virtual companions to relieve loneliness, health monitoring applications to track vital signs, detect abnormalities and notify health professionals, self driving cars, AI powered navigation systems that can consider mobility and accessibility, robots that can perform household chores. The list is endless.
In the financial sphere, AI will be increasingly used to help people manage their finances in terms of budgeting, investment and planning for retirement.
While this is all good news, there are some downsides. AI may also bring about a much earlier than planned retirement for some people as jobs change or even disappear with the increased use of technology. AI will also require change to the way we do things. The winners will be those who embrace it and make the most of it.
