So how is the rise of GenAI likely to impact investors? As with any disruptive trend, investors should be on the lookout for both opportunities and risks. “There’s huge upside for investors when it comes to AI,” says Baird Retirement Management advisor Andrew Atkinson. “That said, all the hype around AI can lead to overvalued stocks that don’t reflect the actual financial health of the company, so investors need to exercise caution and discernment."
The most obvious source of potential value for investors comes from the companies that are directly involved in building the AI platforms being used by individuals and companies. Like dot-com companies in the late 1990s and early 2000s, today’s AI-focused companies are generating significant interest from investors looking to capitalize on this disruptive technology. Venture capital funds are pumping huge amounts of money into companies involved in AI. In the first half of 2024, these companies accounted for more than 40% of new “unicorns”—private companies that reached valuations of over $1 billion—and over 60% of the increase in total venture-backed valuation.6
Publicly traded companies with direct AI exposure have also proven attractive for investors. These include the major tech companies that sit at the top of the S&P 500. But it also includes companies such as chipmakers that are benefiting from the need for more powerful computing to run AI platforms, and data centers that can house the huge array of servers that act as the backbone of GenAI. Investors also are seeking out shares of companies that are using AI to make innovative products. For example, companies are developing breakthrough medical treatments and revolutionizing manufacturing processes with the help of AI.
With all of these opportunities, of course, come risks for investors. Investors who experienced the dot-com boom and its subsequent crash in the early 2000s might worry that a similar scenario could play out with AI today. While it’s anyone’s guess exactly where AI will go from here, it’s highly likely that there will be no shortage of both winners and losers. Moreover, the playing field for AI-related companies is likely to shift amid continued changes in consumer desires, company goals and government regulations. Picking winners and losers as the landscape continually changes is a challenge that most investors won’t benefit from. “When certain sectors are experiencing high growth, investors might be tempted to overweight their portfolios toward those sectors,” Atkinson says. “That’s understandable, but it leads to increased exposure to risk.”
Instead, Atkinson and his colleagues recommend investors focus more on building and sticking with a plan centered around their own risk tolerance and their unique short- and long-term goals. Then, investors will have a more stable foundation from which to introduce AI exposure. Indeed, it’s likely that investors won’t need to work too hard to make sure their portfolios include exposure to AI as this powerful technology continues to drive growth across industries and sectors.
“If you’re an investor, you’re probably already exposed to AI in one form or another,” Leatherwood says. And while it may benefit some investors looking for short-term returns to increase their exposure, he says, that should never come at the expense of holding a balanced mix of assets. “The best way for investors to access AI is as part of a diversified portfolio.”
AI may go through cycles of boom and bust, but—just like the internet before it—it’s not going to disappear. Investors who can disengage from the news cycle surrounding AI and allow it to drive growth as part of a balanced portfolio stand to benefit in the short term, as well as in the years and even decades to come.
