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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement. My name is Mike Decker. I'm a licensed financial adviser who can even file your taxes. Now that said, please remember, this is just a show. Everything you hear should be considered informational as in not financial advice.
Mike:If you want financial advice, you can contact our team today by going to www.yourwealthanalysis.com. Joining me is David Franson, my colleague. David, thanks for being here. Hello, Mike. David's gonna read your questions, and I will do my best to answer them.
Mike:Text your questions in right now to (913) 363-1234. Again, that's (913) 363-1234. Let's begin.
David:Hey, Mike. Is AI better than an adviser at making trades and managing a portfolio?
Mike:This is a nice genuine question because there's been a significant shift in how we operate in the markets. Not necessarily the markets themselves, but how our relationship has now evolved into the markets. Let me see if I can paint a clearer picture,
David:though. Okay. Yeah. Tell us what you mean by that.
Mike:Our relationship with farming fundamentally changed when the tractor was invented. It was fundamentally changed when we realized how to do monolithic crops, and it significantly changed when we figured out pesticides. Now I'm not for or against pesticides. That's not my area of specialties. But do you see how a technology can change our perception, the cost of, and just every aspect of an industry?
Mike:Now hear me out. Okay. What is AI? It's just a computer that is smart and can do calculations for us faster than us on our own. That's it.
Mike:I know we call them large language models. And look, I've delved deep into the rabbit hole to understand how ChatGPT works, how Grok works, how all these different AI softwares work, but the simplest form is it's really binary experimentation of just learning how to interact with certain situations. We just figured out a way to advance the consumer's ability to get information that they want faster and more comprehensively. But we've been kinda doing that in the financial services for a long time. It just took another leap forward.
David:How does that manifest itself?
Mike:In the nineteen forties, we started using computers mostly for military purposes. Do you remember Alan Turing and the Imitation Game?
David:Yes.
Mike:The movie there? I did see that. Basically helped us win the war. We started interpreting using computers. We would figure out the line of the code, and then we would decipher basically the war and what was going on.
Mike:That was the step of AI. It's to get a computer to do something faster than we could on our own. K? Now when you look at the fifties and sixties, the banking industry and other financial industries started using technology mostly for accounting purpose and just general business, but then in the seventies and eighties, it started advancing towards algorithms. So for example, you can track certain metrics in the market like a moving average.
Mike:I'll just use this one. This is the easier one to explain. The moving average, let's say the two hundred day moving average, which is a very commonly used indicator. It takes the average price of, let's say, the S and P 500, so SPY or VOO, the average price of that position over the last two hundred days, so the ups and downs, what's the average price, and compares it to today's price. And if today's price is higher than the average of the last two hundred days, most people would consider that an uptrend, that the markets are going up.
Mike:If the average price is below, then it would be considered in a downtrend. And this algorithm, this simple calculation gives investors an insight into then what would be happening here. K? So you with me so far?
David:I'm with you.
Mike:Yeah. It's just a simple equation that can be done in the blink of an eye.
David:Okay.
Mike:So you've got the seventies and eighties, and Wall Street is investing heavily into computers, into running the algorithms, so that they can react quicker to whatever the markets are doing. Great. Advanced now into the nineties and February, things get a little bit more advanced. You start to see things called high frequency trading. High frequency trading is the shops that are as close to Wall Street as possible that have very advanced computers with direct lines to the trading floors Oh.
Mike:So that when an indicator happens according to their algorithm, that they can get in faster and leave faster than anyone else. Their trades get in I see. And it's just because they're there sooner. They have the high frequency is what they call it or the the quicker trade. Why does this matter?
Mike:If you're so concerned about getting in that you're concerned about the metal of the wiring and the fiber optics of your cable, that you're concerned about these supercomputers, and even the metal that's used in the different computers and and so on, that's pretty fast. So if you think AI is fast, what these folks are calculating is infinitely faster. The amount of bandwidth and computing power to do high frequency trading is insane. And then to optimize the code so the code goes faster, we're talking not milliseconds, but, like, nanoseconds of differences that they obsess over to get that little advantage. And so they're constantly been working
David:on this over the decades? Oh, it's been
Mike:going on for, yeah, decades. This is not a new thing, but many people don't know it exists. So anyway and then you advance to 2010 and so on, the automations become more common, more prevalent. Computers have advanced for the trading advantage, the algorithm, the model, whatever you wanna call it. But notice this has been going on for many, many years.
Mike:So when people say, well, is AI gonna replace financial advisors? My immediate thought is it depends on who is handling the tool.
David:What everyone wants to know is, is your job safe, Mike?
Mike:If AI took over this industry, I could still find work elsewhere. I don't care. I shouldn't say I don't care. I do care, but I'm not concerned about creative destruction.
David:Oh, yes. Yes. You've talked about that before.
Mike:Yeah. And creative destruction is when your job is replaced by technology. And the reason why I'm not concerned about it is because markets are emotional. You can't just ask chat GPT to beat the market every single year. Markets are emotional, and also what's your risk tolerance?
Mike:What do you want your investments to do for you? There's so much nuance in there that you have to be the controller, not the tool. Okay. So for example, let's say you wanna use ChatGPT for your trading, and please don't do this. But let's just say, if that were the case, then you could say, hey, ChatGPT or Grok, write me an investment algorithm that can time the market.
Mike:You've overestimated your abilities and ChatGPT's abilities to be able to do something that you don't actually understand. That's like saying, chat GPT, I wanna perform this surgery on someone. Tell me everything I need to know, and I'll just follow those instructions. Okay. So I cut open the don't know.
Mike:What what do you call it? The chest? I cut I'll cut open the chest this way, and I'm gonna insert these numbing medications or whatever here, and and I'll just follow the instructions, and it'll be fine. Granted, that's more of a life and death situation. It's not as extreme, but you get the idea.
Mike:So the reason why I'm bringing this up is there's something called the Dunning Kruger effect, and it's gonna wreak havoc on a lot of people, in my opinion, in the near future because they are becoming over reliant on chatty PT. They're utilizing the tool without enough understanding of the fundamentals of how finance works. Here's an example. There's a couple of stocks that have made many people very, very wealthy. Palantir, Nvidia, for example.
Mike:They may do really, really well in the near future, but most people I've met that are investing in those stocks do not understand the risk they're taking for the growth potential that they've experienced. For the last fifteen years, we've been treated very well investing in large cap or large companies with a growth incentive or a growth theme. Whenever the markets crash next, those are the ones that will probably go down the hardest. So let's say that Nvidia has grown exponentially over the last two years, which it has, and you bought in now. Are you okay potentially losing 50 or 70% of those assets?
Mike:Maybe that happens. Maybe it doesn't happen. It happened to Amazon in the nineties and February. Amazon's a great company. It eventually came around, but it took over a decade to come around.
Mike:If you're retired or near retirement, can you really take that risk? So going back to chat the psychological phenomenon is called the Dunning Kruger effect, and that explains why I think people are over dependent on ChatGPT thinking it can beat out other models. The Dunning Kruger effect basically assumes or suggests that people who lack experience don't know the right questions to ask. So if you're gonna use ChatGPT or any AI to create a model, do you know to look for the Fibiacci retracement? Do you know to look at not just the two hundred day moving average, but the fifty day moving averages and how those correlate?
Mike:Do you know that 60% of the time when the fifty day moving average goes from negative to positive with the two hundred day moving average, that roughly speaking, there's a 60% chance that it will actually break out and grow, but there's a 40% chance that it falls off a cliff and keeps going down? Do you know what resistance levels are and the different variations of that? Do you understand the nuance of head and shoulders and and the market trends there? And I'm just touching the tip of the iceberg here of the did you know? Do you know to look for these things?
Mike:If you don't, you could be overestimating what ChatGPT said, so it must be right because it quantifies everything. ChatGPT is only as good as the inputs you have. Garbage in, garbage out. You have to start to question, okay. Well, what is do you want to use ChatGPT for your services or for your trading or whatever it is?
Mike:If it's an insignificant part of your overall portfolio, why not? Do whatever you want with your money. But if it's everything you depend on, your life savings, I would caution against it. Now there are services out there, subscriptions that you can enjoy that use ChatTPT, but professionals, people with sufficient experience, have then created and trained ChatGPT or their AI algorithms to do a certain thing. That's been happening for a long time.
Mike:We just now have a new name for it. Proceed with caution. And here's why I cannot emphasize that enough. I've seen many, many of them, you know, on X or or Facebook or LinkedIn, and they're bragging about how their performance is outstanding and things like that. And for them, I'd say, wonderful.
Mike:I'm I'm happy that you've been making money. But you don't earn your stripes when the markets keep going up. You earn your stripes when the markets are going down.
David:Yeah. Good
Mike:point. And many of them were established after the pandemic. So what they had was was it '22 or '23 that the markets they had some difficulty. It wasn't a market crash. You're not earning your stripes in that kind of a situation.
Mike:You earn your stripes in the nineteen eighty seven Black Monday when the markets tank in a very short period of time. You earn your stripes when you're navigating political unrest like in 1990 when Iraq invades Kuwait. You earn your stripes in the fifties and sixties when the markets crash because of interest rates and inflationary issues. You earn your stripes in 02/2001 and o two when the Nasdaq is down 70%. In tech stops, everything that the algorithm said you should buy were doing horrible, and you had the foresight to diversify in other industries like real estate or in bonds or something else.
Mike:You earned your stripes in 2008 when you think, generally speaking, the public thought that the banking and financial industry is going to collapse, and you move into the bond market, the largest financial investment market in the world, aside from foreign exchange, that you advance in other areas, and you hedge against it because you had the foresight not to get greedy focusing on growth and forgetting the risk that you're taking, because no risk, no reward. Well, that's a dumb phrase. The risk you're taking is directly correlated with the growth potential, but the more growth potential, the more loss potential you also have. And we have forgotten what that really looks like over the last fifteen years, because we've been printing money, which makes its way up to large cap stocks. That's why the S and P five hundred continually seems to do well, and it'll keep doing that until it doesn't.
Mike:That's why we've forgotten about how bond funds, as much as I hate them, have a place sometimes in certain portfolios under certain conditions. And do you have the knowledge or foresight to understand those conditions? I'm not saying you need to develop a codependent relationship with an adviser. I'm saying if you wanna go down the chat GPT route or you wanna be a DYI investor, you should never stop learning. Always ask the question, what risks am I taking?
Mike:What's the downside of this? Because there's an even distribution of risk versus growth potential. And the more growth potential, the more downside risk you are taking. There's no way to economically separate it. You cannot time the market as in going in the market and then going to cash.
Mike:No one can do that consistently. And so you need to understand AI is just a more advanced version of what we've already been doing for decades. There's a story, an actual case study of a college kid that was hired by a large fund. I won't say who. They're out of business.
Mike:The SEC destroyed them, spoiler alert. But they hired a very smart I don't know if it was a PhD candidate or something like that or a master's in economics, whatever, very smart kid to build an algorithm that would then allow them to maximize returns. A very normal thing. So the kid breaks out Excel. This is, I think, in, like, 2010 or something like that, if I remember right, figures out an algorithm based on back tested data, hands it to them, and they implemented it.
Mike:And their clients lost so much money
David:Oh, boy.
Mike:Because they didn't double check his work. They didn't stress test it. They didn't look at the different financial environments that he could play under. I mean, there's a reason why they're out of business. There's a reason why the SEC got involved.
Mike:Be very careful about these new investors, new managers with new ideas using ChatGPT to sound smart, but it may not be tested for these different seasons and economic environments. Proceed with caution. I mean, my day starts at 02:30 in the morning. I'm not up yet, but my day technically starts then because I'm receiving reports from our, quote, unquote, AI algorithms doing the research so that I can take it, move it around when I wake up, and then understand, okay. Here's where the market's moving.
Mike:Here are the shifts. I'm double checking its work. I'm using it as quick research, so we don't need a staff of 20 to do the research. We can have the AI algorithms doing the research based on what we've taught it to do with specific algorithms and specific indicators, so that the report can come back, so I can see what's going on, and then I can make decisions moving forward.
David:That makes sense.
Mike:But it it's taken me a decade to really dive into those details to understand that, hey. If interest rates go up or down, here's how it would affect the different models. And based on the political environment, which is an emotional situation, this is some of the risks that you may not be able to calculate in an algorithm. It's more qualitative, not quantitative, and you've gotta marry the two together. So the reason why is I'm not sitting here defending, oh, I'm a financial adviser, and you need me.
Mike:I'm saying proceed with caution, because there's a lot of options out there where it's just lipstick on the pick, where it looks really, really good, but you have to question its long term effectiveness. Is this making sense?
David:I think it's a deeply, like, sort of nuanced or there's more than than we know about it. Right? On the surface, we can just enter these prompts in, and we think that everything that comes back is so amazing and true. Right? But it may not be.
Mike:Just do research. Go to YouTube and type in the Dunning Kruger effect. Yeah. Even though it's a psychological YouTube video that's been nicknamed why stupid people think they're smart, it's really why uninformed people or people that lack experience overestimate their abilities. Don't work with someone in any capacity if it's someone that's new and lacking experience.
Mike:Now they may be young, but they were mentored by someone with wisdom and experience. I have no problem with that. But the rogue person that decided I'm just gonna cheat Wall Street and beat them out and did a few prompts in the chat GPT and then built a nice website, like, just be careful. There are wolves in sheep's clothing. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or
David:if you're missing tax minimization opportunities that you
Mike:may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
David:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get
Mike:started.