The artificial intelligence (AI) boom has captured the imagination of investors globally. As the AI megatrend is here to stay, investors want to get in on the ground floor and benefit from market-thumping gains in the next decade. But should pensioners, too, invest in this extremely disruptive sector?
Generally, pensioners are advised to invest in lower-risk asset classes such as bonds, and for good reason. Age is the single most important factor that should define your risk appetite. For example, when individuals are younger, they can invest in higher-risk assets such as individual stocks and mutual funds. Investing in the equity market is a long-term strategy that allows you to benefit from the power of compounding.
While equities are extremely volatile, they have delivered inflation-beating returns to shareholders over the past several decades. Alternatively, major indices such as the S&P 500 have pulled back significantly during economic downturns such as the COVID-19 pandemic, the dot-com bubble, and the financial crisis. A pensioner who invested at the peak of the great financial crash in 2008 would experience a 50% dip in the portfolio, which is far from ideal.
Basically, as you get older, it makes sense to increase your exposure to fixed-income instruments such as Guaranteed Investment Certificates. Several financial experts have suggested that a 30-year-old can have 30% exposure to bonds and 70% to equities. Similarly, a 65-year-old should have 65% exposure to bonds and 35% to equities.
Given these factors, pensioners can consider gaining a small exposure to AI stocks. Let’s see how.
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Invest in AI market leaders
The best way to gain exposure to AI stocks is to invest in market leaders such as Meta (NASDAQ: META), Microsoft (NASDAQ: META), and Nvidia (NASDAQ: NVDA). Despite their massive size, each of these megacap companies is growing at an enviable pace.
Meta’s sales increased 22% year over year to US$39.1 billion as the social media giant continues to invest heavily in AI. In the earnings call, Meta chief executive officer Mark Zuckerberg explained that its advances in AI should help it improve recommendations and drive engagement across platforms such as Instagram and Facebook.
Meta also expects AI to enhance the ad experience as digital ad impressions across platforms rose 10% year over year in Q2.
Next, Microsoft already enjoys a first-mover advantage due to its investment in OpenAI, the parent company of ChatGPT. In the fiscal fourth quarter (Q4) of 2024 (ended in June), Microsoft’s Azure business grew sales by 29% year over year, with eight percentage points attributed to AI.
In the June quarter, the cloud business accounted for US$36.8 billion and should drive revenue and earnings growth in the future. MSFT stock might seem expensive at 33.5 times forward earnings, but analysts expect adjusted earnings to grow by 13.3% annually in the next five years.
Finally, Nvidia is an AI stock that should be on your watchlist. Down 20% from all-time highs, Nvidia accounts for between 70% and 95% of the AI chip market, which provides the chip maker with significant pricing power.
Moreover, Nvidia’s high profit margins allowed it to end the April quarter with a free cash flow of US$15 billion, which can be used to reinvest in organic growth and accretive acquisitions.
