Artificial intelligence (AI) promises to join the list of technology game-changers -- from the telephone all the way back in the 1870s to, much more recently, the Internet. This is because AI has wide-reaching potential to save companies and individuals time and money. This hot technology could help companies gain in efficiency and in some cases develop a product that may transform lives -- such as a better-performing medical device or drug.
Analysts predict that today's $200 billion AI market could roar higher in the coming years and reach beyond $1 trillion by the end of the decade. It's no surprise, then, to see AI giants such as Nvidia or Super Micro Computer soaring to record levels and generating billions of dollars in revenue. Nvidia dominates the AI chip market, while Super Micro sells the servers and full rack scale systems used in AI data centers.
And it's also no surprise to see investors piling into AI stocks and winning big. But, in recent times, some economists have started to warn about a market bubble set to burst. And certain analysts question AI's transformative potential, calling into question the future of this technology. If these experts are right, a portfolio heavily exposed to AI stocks may greatly suffer in the near term or down the road. But this doesn't mean you shouldn't invest in this area, which still may deliver significant growth. Here's how to build a portfolio that could soar in an AI boom and withstand an AI crash...
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Two AI perspectives from Goldman Sachs
First, though, a quick look at two different perspectives on AI, and we can find them both at Goldman Sachs. Senior global economist Joseph Briggs predicts generative AI will automate 25% of work tasks and become more cost effective over time. But head of global equity research Jim Covello says AI is too costly to become a disruptive technology -- even over time -- and questions the ability of AI to eventually boost a company's revenue.
Right now, it's too early to say which prediction will become a reality. It's possible that both Goldman experts will be right on some points -- and AI will be successful to a certain degree but won't reach the market's expectations. All of this means it's also impossible to predict with 100% accuracy the path of AI stocks down the road. They could soar, offer decent gains, or crash at a particular point.
Now here's how to construct a portfolio that will help you navigate these uncertain waters and potentially sail on to an investment victory over time.
Before all else, it's important to consider your comfort with risk. If you're very cautious and the thought of a crash keeps you up at night, you'll want to limit your AI exposure to a small portion of your portfolio (and fill the rest with a broad range of quality companies, with a focus on safer investments such as healthcare stocks and dividend stocks.) And when investing in AI, you should favor companies that built a solid business prior to the emergence of this technology and don't rely heavily on it for their revenues.
Amazon's AI successes
A good example is Amazon (AMZN +0.55%). This e-commerce and cloud computing powerhouse has invested heavily in AI, and this is already bearing some fruit. Amazon has been using AI to speed up its fulfillment process, and this has helped the company lower its cost to serve. In the area of cloud, Amazon Web Services (AWS) has reached a $100 billion annual revenue run rate thanks to the broad range of AI services it offers to customers.
But if AI turns out to be less of a game-changer than expected, Amazon still should continue generating growth over time through its e-commerce and cloud businesses.
NASDAQ: AMZN
Key Data Points
Another potential investment for the cautious investor is an AI exchange-traded fund such as the Roundhill Generative AI & Technology ETF (CHAT +2.71%). This ETF invests in more than 50 companies involved in AI, offering you exposure to many AI players -- so one small investment offers you multiple chances to win, and you don't have to do the heavy lifting of selecting each individual stock.
Middle-of-the road and aggressive investors
If you're a middle-of-the-road investor, comfortable with some risk and looking for growth, you might invest in tech giants with broad businesses like Amazon, but it's also a great idea to add a couple of AI market leaders to your portfolio, such as Nvidia and Super Micro. And if you're an aggressive investor, you may add these leaders and bet on players in a new potential area of AI growth too, such as AI software.
Of course, even if you're an aggressive investor, you'll want to make sure you diversify your portfolio enough so that if you're highly focused AI bets crash, other stocks may compensate. You can do this by selecting strong stocks across other industries such as healthcare and consumer goods -- and even some dividend-paying stocks to offer you passive income.
On top of this, to ensure your portfolio scores a win for you, remember not to panic during a downturn, and if your stocks' long-term prospects look bright, hold on to them. Crashes happen, but history shows us the market has always gone on to gain. This means that, whether the AI boom lasts or not, a well-though-out portfolio could off you top returns over the long term.
