There are several types of trends in the market that investors can leverage to their advantage. One of the most common and well-understood trends is recovery after a market crash, which may propel many stocks upward rapidly. Then, there are regular bull and bear market trends.
Sector-specific trends, such as slumping oil demand or rising gold prices, also impact stock valuation in those sectors.
Very rarely have there been trends (other than market crashes) that have impacted the market in as significant a way as artificial intelligence (AI) has. While its impact is quite comprehensive and spread out over multiple sectors/industries/market segments, it is most prominent in the tech sector.
Investing in AI stocks is a great way to jump on the bandwagon that’s still accelerating, but investors should understand that it comes with its own set of risks.
The risks of AI investments
AI is perhaps the most significant and transformative technology since the internet, and it’s already changing the world in more ways than one. However, it’s also unpredictable and rapidly evolving, which is where the investment risk stems from.
The industry and even individual AI companies and technologies change too rapidly to place safe and predictable bets.
Some keep evolving to retain their competitive advantage, while others may become obsolete in a matter of months (or prove unfeasible). So, even the most ground-breaking AI technologies and the companies and stocks representing them should be treated with caution. If you are still adamant about investing in AI stocks, a proactive exit strategy might be wise.
A more predictable alternative
Consistently growing tech stocks like Constellation Software (TSX:CSU) might be a much safer alternative for conservative investors. The incredibly high price tag of over $4,000 per share might be a barrier, but you can opt to buy fractional shares of the company.
The stock’s track record is brilliant, and even though the current growth pace is a far cry from its golden days, it’s still better than many conventional growth stocks.
Some of this “stable” growth comes from the business model itself. The company is a group of six other companies that themselves include several smaller companies each, targeting specific vertical markets. The ownership structure is also a stability factor since nearly half of the company is owned by institutional investors, and insiders have a sizable stake in the company.
Foolish takeaway
When it comes to AI stocks, the first thing to consider is your risk tolerance. The volatility of AI stocks makes it too erratic for most investors. But if that doesn’t include you, the next step is to develop an understanding of AI technologies and how similar ones have performed in the market before so you can make educated choices regarding your AI picks.
