The £20,000 annual allowance of Stocks and Shares ISAs across Britain has just been reset. And with the start of a new tax year, many new investors are entering the market as economic conditions slowly improve and savings rates fall.
One of the biggest challenges investors face is building a well-balanced portfolio. But with artificial intelligence (AI) models constantly getting smarter, why not outsource this task to ChatGPT?
After tasking the chatbot to build an ISA portfolio, it made 10 recommendations. And some of the suggestions actually look like decent foundational stocks. However, ChatGPT also made some pretty risky and volatile suggestions. In fact, the model doesn’t appear to have taken risk tolerance into account at all.
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Building a balanced ISA
The list of stocks that ChatGPT recommended is:
- AstraZeneca (LSE:AZN)
- Apple
- Microsoft
- Tesla
- Unilever
- Diageo
- Shell
- Johnson & Johnson
- NextEra Energy
- Ørsted
The portfolio offers exposure to a variety of industries, such as beverages, pharmaceuticals, consumer staples, energy, technology, and automotive. What’s more, half of the companies are listed outside of the UK, with operations spanning the globe, offering even more geographical diversification benefits.
The businesses themselves are also well-known industry titans, with large market capitalisations and deep financial pockets that reduce the risk of bankruptcy. And with some touting a long history of paying dividends, this portfolio offers a nice blend of both growth and income investments.
Overall, everything appears to be in place. So what’s wrong with this ISA portfolio?
Understanding risk
Despite the large scale of these businesses, several of ChatGPT’s suggestions are pretty risky stock picks. For example, Tesla has recently seen almost half of its market-cap wiped out in just the last few months, Diageo has been on a similar decline since 2022, as has Ørsted.
Of course, not all of these companies are on a downward trajectory. AstraZeneca is one of these exceptions, and the pharma giant’s steady stream of successful clinical trial results has propelled the stock price higher. In fact, it’s now the largest enterprise on the entire London Stock Exchange.
Sadly, that still doesn’t make it a risk-free investment. Clinical trials are notoriously challenging and expensive to execute. And just because it’s been enjoying successes recently doesn’t mean it will continue to do so. In fact, the company has experienced many painful clinical trial failures over the years.
Case in point, in 2017, its phase-three MYSTIC trial failed in the final home stretch, resulting in the AstraZeneca share price collapsing by over 15% in a single day.
In other words, investing in pharmaceuticals can be a volatile journey, even among the biggest names, such as AstraZeneca and Johnson & Johnson.
The bottom line
Every one of ChatGPT’s recommended ISA stocks has its risks, some bigger than others. Diversification can help take some of the sting away. But it’s still paramount that investors dig into the details to understand exactly what sort of investments they are making and whether they fit within their risk tolerance limits.
