In recent years, artificial intelligence (AI) and automation have moved from the realm of science fiction to our everyday reality.
Just as the pharmaceutical industry experiences periodic breakthroughs with blockbuster drugs that revolutionize treatments, artificial intelligence may be a similar transformative force in technology. And just as a blockbuster drug can both generate billions in revenue and change healthcare outcomes for the better, AI has the potential to create new economic ecosystems and transform the way we work—generating unprecedented value and challenging existing business models.
Echoes from the past
Breakthroughs and blockbusters bring disruption along with innovation. When ChatGPT and other large language model (LLM) technologies became available to the general public, headlines quickly followed warning that no job was safe from automation.
For many, this clamor had echoes of the rise of the internet in the late 90’s and early 2000’s. At the time it was predicted that the internet would make many jobs, industries, and companies obsolete. The world wide web was expected to bring us closer socially, foster global connections, and put information at everyone’s fingertips.
Thirty years later, some of these predictions have come to pass, while others have turned out differently than expected. In planning for the coming “AI revolution,” it is important to maintain perspective. Some AI applications will be game changers, creating enormous value and changing the way we work, while others will be overhyped and have no impact.
As with any instance of upheaval or rapid change, you can grasp some measure of certainty by focusing on areas under your control. With respect to your finances, this means taking a fresh look at your financial plan and preparing to take advantage of the changing landscape within your investment plan.
Shoring Up Your Personal Finances
Regardless of the cause of the disruption, there are a few bedrock principles that you should return to regularly to build a moat around your financial life.
- Keep an Emergency Fund – We recommend that you keep a cash reserve that will cover 6 to 12 months’ worth of living expenses on hand at all times. This reserve should be held in a high-yield savings account, money market, or CD, so that it earns interest. If you dip into this reserve every now and then for special expenses, then it is time to replenish the account. When calculating living expenses include the essentials, but exclude things that are easily paused or canceled in a pinch, like a Netflix subscription.
- Review Your Budget – In our experience, most people do not keep a detailed budget and review it regularly. Take a fresh look at your spending, and how it breaks down by category. Your credit card and bank usually provide a summary, and there are apps available if you want to aggregate your data in one place. Compare total spending against total income to determine your savings rate and cushion. If you had to change jobs and take a lower salary, could you afford it? Are there areas of the budget that could be easily cut? Do you have subscriptions or apps that you signed up for years ago but no longer use? If aggregating, analyzing the data, and budgeting against your income isn’t a task you have time for on your own, it may be time for a financial plan.
- Keep an Eye on Debt – As always, pay off your credit cards monthly, and minimize high-interest debt wherever possible. Conversely, if you have equity built up in your home, you might consider opening a home equity line of credit (HELOC) as a backstop in case of a cash crunch. HELOC debt typically carries interest rates closer to mortgage rates (6-7% currently), so it’s a cheaper source of funding than credit cards, which often carry interest rates in the range of 20% to 30%. Interest only starts once you tap into the line, so there is no harm in opening it before you need it. Bear in mind, debt should be the absolute last resort for funding living expenses.
- Keep your Priorities Straight – If you have credit card debt, do everything you can to pay it off. You may want to consider foregoing retirement plan contributions for a time if you think you will be better off in the long run. Retirement plan investments, even if they grow at 10% per year, might not make up for the interest cost of 20% or more on credit card debt. If you don’t have the cash flow to immediately pay them off, but you have home equity, you should consider paying off those debts with a HELOC, reducing your interest cost.
If you have these pieces locked in, you will have the flexibility to meet what comes next. An emergency fund and a budget will give you a clear view of how much cushion you have, should you be in the market for a new job or considering a pivot to a new career. Getting your debt in order and establishing a home equity line (if possible) as a backstop will give you a safety net if things don’t go as planned.
Look for Investment Opportunities
If you are in a position or industry that is relatively secure from AI disruption, you have the luxury of focusing on taking advantage of the vast potential of AI now and in the future.
Here again, it can be instructive to look back to the dot-com era. Many of the early darlings of that era were the companies building the infrastructure that helped deliver the internet – cable and network companies, search engines, and ISPs. However, these were not the long-term winners of the internet revolution.
Ultimately many of the companies that offered the best returns were second wave companies that capitalized on the already constructed internet infrastructure, or large corporations that were nimble enough to adapt to the new reality. Amazon, Apple, Google, Facebook, Netflix, PayPal and others succeeded by using the internet infrastructure to deliver a product, platform, or service.
To be sure, Amazon, Google, and others were there early. But if we take any lesson from the dot-com era, it’s that it will take a while to sort out the winners and the losers. As a result, we think a balanced approach is best. We do not generally advocate for industry-specific funds or placing significant investments in individual funds. However, we have our eye on the following areas going forward:
- AI and Automation Stocks – Companies leading advancements in robotics, machine learning, and data analytics are the most obvious opportunities. Tech giants like Nvidia, Alphabet, and Microsoft are at the forefront, but emerging startups in AI software and automation tools will present opportunities.
- Digital Infrastructure – The rise of AI and cloud services has started an arms race of investment in digital infrastructure, including data centers and fiber networks. Companies that build-out, own, and operate these data centers and networks are forecasting significant growth over the next several years.
- Energy – By the same token, these data centers and networks, if built out at the scale currently forecast, will have enormous power needs that cannot be met by the current capacity. Utilities, storage companies, energy infrastructure companies, grid operators, and renewable energy companies are all poised to benefit from the rise of AI, if they position themselves properly.
- Patience – Lastly, industries like healthcare, finance, big data, and manufacturing will have companies that capitalize on AI to push forward, while others will fall behind. It is very difficult to forecast winners and losers ahead of time.
The dot-com era saw the rise of the internet and tech-focused funds looking to draw investment dollars, including one that famously offered “extreme risk, explosive potential.” While some of these may work out well in the long run, themed funds like these tend to be thought up by the marketing department, rather than the investment analysts.
As always, your investments should be diversified and allocated in a manner that is consistent with your goals and financial plan. Even if the AI revolution is as life-changing as the rise of the web, that doesn’t mean AI stocks will be the winners. If we look back over the past 25 years, the following stocks were the best performers since March 2000:
| Company | Industry |
| Monster Beverage | Energy drinks |
| Texas Pacific Land Trust | Oil royalties |
| Deckers Outdoor | Footwear (Teva, Hoka, UGGs) |
| Old Dominion Freight | Trucking |
| Axon Enterprise | Weapons |
| Tractor Supply | Hardware & farm equipment |
This is hardly a list of tech titans. Opportunities will abound in a variety of areas. Staying adaptable and financially prepared will not only help you manage your wealth but also position you to take advantage of the opportunities that AI and automation create.
While you can’t fully future proof your finances, you can take steps now to remain flexible and meet the future head on, wherever the path leads.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.