It usually takes me a few days to write a comprehensive lead article. I will give myself 30 minutes to complete this piece including establishing an account with OpenAI, asking six common investing questions and giving a short introduction.
I originally intended to write a summary about how OpenAI works but then I thought, what the heck, it can do the job itself (and ChatGPT is similar).
To keep to my time limit, I’ll let you be the judge of the quality of the answers with only a brief comment from me.
My overall verdict? Impressive. There’s a bit of rambling which the editor in me would remove, with too much use of redundant phrases such as "It's important to note ...". It often wastes space by repeating the question in the answer. The advice on how to select a fund manager was especially verbose. OpenAI can’t even work it out, so what hope the rest of us.
I also asked a couple of questions that required a forecast, such as how will the stock market perform over 2023, and it refused to answer:
“I'm a language model AI, I don't have the ability to predict future events such as the stock market's performance.”
All the analysts, fund managers, economists and tea leaf readers out there are safe for now. You can pontificate all you want without an AI threat.
Here are the responses from OpenAI, and as I write this sentence to complete the article, 30 minutes is up.
How does OpenAI work?
OpenAI is a research laboratory focused on artificial intelligence (AI) and machine learning. OpenAI develops and runs a range of projects and programs to advance the development of artificial general intelligence (AGI) and deep learning. OpenAI researchers create and study algorithms that can learn to solve complex problems, such as recognizing speech or playing games. OpenAI also works to bring together the best minds in AI research, including those from academia, industry, and the public, to work together on breakthroughs in the field. In addition to its research activities, OpenAI also develops and deploys products and services that help people use AI technologies safely and ethically, including building and sharing open-source libraries and tools.
Six investment-related questions
1. How does an investment strategy of a 20-year-old differ from a 60-year-old?
An investment strategy for a 20-year-old may involve taking on more risk in order to potentially earn higher returns, as they have a longer time horizon to weather market fluctuations. This may include investing a larger portion of their portfolio in stocks and other growth-oriented assets. On the other hand, a 60-year-old's investment strategy may focus more on preserving capital and generating income, as they may be nearing retirement and have a shorter time horizon. This may include investing a larger portion of their portfolio in bonds and other income-generating assets, as well as potentially reducing exposure to stocks. It's important to note that everyone's situation is unique, and an investment strategy should be tailored to an individual's specific goals, risk tolerance, and time horizon.
2. Why do most active fund managers fail to outperform an index or benchmark?
There are several reasons why most active fund managers fail to outperform an index or benchmark. One reason is that the markets are generally efficient, meaning that most publicly available information is already reflected in the prices of securities. This makes it difficult for active managers to find undervalued securities that they can buy at a discount and then sell for a profit.
Another reason is that there is a lot of competition among active managers. With so many professionals trying to beat the market, it becomes increasingly difficult for any one of them to consistently find mispriced securities. Additionally, the cost of active management is usually higher than passive management, and these costs can eat into returns.
Lastly, active managers tend to underperform in bear markets, as they tend to sell their positions, and also they tend to have higher turnover, which results in higher transaction cost and taxes.
It's important to note that, while the majority of active managers underperform, there are some who do outperform their benchmark, but it's difficult to predict in advance which ones will be the successful ones.
3. Should the Australian superannuation system be abolished?
The question of whether the Australian superannuation system, also known as the country's mandatory retirement savings plan, should be abolished is a complex and highly debated topic.
On one hand, the superannuation system has been successful in helping many Australians save for retirement and build a nest egg for their golden years. The system has also helped to diversify the country's economy by channeling funds into investments such as infrastructure and real estate.
On the other hand, some argue that the superannuation system is too complex and that the fees charged by funds are too high, which can eat into returns. Additionally, the system has been criticized for not providing enough flexibility for individuals to access their funds in times of need.
In any case, abolishing the superannuation system would require a significant overhaul of the country's retirement savings infrastructure and would likely have major implications for the economy and for individual Australians.
It's worth noting that, the Australian government has made some changes to the superannuation system in recent years to make it more efficient, fair and sustainable.
4. How much can a person spend in retirement and not run out of money?
The amount that a person can spend in retirement without running out of money depends on several factors, including the size of their nest egg, their expected lifespan, the rate of return on their investments, and the rate of inflation.
A commonly used rule of thumb is the "4% rule," which states that a retiree can safely withdraw 4% of their nest egg in the first year of retirement and then adjust for inflation in subsequent years. For example, if a retiree has a nest egg of $500,000, they could withdraw $20,000 (4%) in the first year, and then increase that amount each year to keep pace with inflation.
However, this rule of thumb is not a one-size-fits-all solution, and the actual amount that an individual can spend in retirement will depend on their unique circumstances. Factors such as the retiree's age, health, and lifestyle will affect the amount that they can safely withdraw. Additionally, unexpected events such as a recession or a prolonged period of low returns on investments can also impact the amount that a retiree can spend without running out of money.
Ultimately, it's important for retirees to have a plan in place that takes into account all of these factors, and to also be prepared for unexpected events. It's also a good idea to have a safety buffer to provide a cushion in case of unexpected events.
5. How do you select fund managers who will outperform?
Selecting fund managers who will outperform is a complex task, as past performance is not always indicative of future returns. However, there are several factors that can be considered when selecting a fund manager:
- Track Record: A fund manager's past performance can provide some insight into their abilities, but it's important to look beyond short-term returns and consider the manager's long-term track record.
- Investment Philosophy: A fund manager's investment philosophy and strategy can also be an important factor to consider. It's important to understand how the manager views the markets and how they make investment decisions.
- Risk Management: A fund manager's approach to risk management can be a critical factor in determining their ability to generate consistent returns over time.
- Experience and Qualifications: The fund manager's experience, qualifications, and professional accreditation can also be relevant when evaluating a fund manager.
- Cost: It's important to consider the fund's expense ratio, management fee and other costs, as these can have a significant impact on the fund's returns over time.
- Process and People: The fund management team, their process, the resources they have and the alignment of interest with shareholders are important factors to consider.
It's important to note that, even with due diligence and analysis, there's no guarantee that a fund manager will outperform in the future, and even the best fund managers may underperform at times. Diversification and regular monitoring of a portfolio will help to mitigate risk and increase the chances of achieving long-term investment goals.
6. Do fund managers need a macro view to select company stocks?
Fund managers typically use a combination of both top-down and bottom-up analysis when selecting company stocks.
Top-down analysis, also known as macro view, involves looking at the overall economic and market conditions to identify sectors or industries that are likely to perform well. This approach focuses on the big picture and can help fund managers identify trends and opportunities that are not visible at the individual stock level.
Bottom-up analysis, on the other hand, involves analyzing the financials and fundamentals of individual companies to identify those that are likely to perform well. This approach focuses on the micro-level and can help fund managers identify companies that are undervalued or have strong growth prospects.
While both approaches have their advantages, a good fund manager will likely use a combination of both, in order to make a well-informed decision. This can help them to identify companies that are well positioned to perform well in the current economic and market conditions, while also taking into account the long-term potential of individual companies.
It's important to note that, a fund manager's approach can vary depending on the fund's investment strategy, the fund's mandate and the fund's objective. Some funds may focus more on growth, others may focus more on value, and others may focus more on dividends.
Final thoughts
Let us know what you think in the comments section.
As a footnote, I continued asking questions after my 30 minutes was up, and found some of the answers superficial and even wrong. For example, it struggled to define the meaningful differences between ETFs and Listed Investment Companies. Maybe my job is safe for now, but for technology in its infancy, it's surprisingly clever.
Graham Hand is Editor-at-Large for Firstlinks, at least until AI replaces him. He is not responsible for any of the answers to these questions, and people should seek advice from OpenAI (sorry financial advisers) for any further information.