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We asked ChatGPT to build a diversified portfolio for a 40-year-old investor with 20 to 25 years until retirement. Building an investment portfolio requires balancing growth potential with risk management, but generic allocation models may miss opportunities for optimization based on current market conditions and asset correlations.
Don’t worry, an expert is here to review the work of artificially intelligent (AI) chatbots and tell us what works – and what doesn’t. Thomas Brock, Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA) and Financial Reviewer Annuity.orgReviewed the AI’s choices and recommended some modifications.
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ChatGPT’s core portfolio
The AI chatbot recommended a growth-focused but diversified structure: 50% US stocks via the Vanguard Total Stock Market ETF (VTI), 20% international stocks via the Vanguard Total International Stock ETF (VXUS), 20% bonds using the Vanguard Total Bond Market ETF (BND) or iShares Core US Aggregate Bond ETF (AGG), 5% real estate with the Vanguard Real Estate ETF (VNQ) and 5% options through SPDR Gold Shares. (GLD).
ChatGPT cites financial planning guides that suggest people over 40 keep about 70% to 80% of their portfolio in stocks and the rest in bonds and other assets to balance growth and stability.
“This structure spreads risk across multiple asset classes so that your investment is not dependent on one market alone,” ChatGPT said. Stocks totaled 70% of the portfolio, combining US and international allocations.
Expert’s major revisions
“ChatGPT has a good portfolio recommendation,” Brock said. However, he identified areas where the allocation was “a little light on the growth front” for someone with decades until retirement.
Brock recommended increasing the total stock allocation to 80% by increasing the allocation to international stocks. “This mix better approximates the global distribution of publicly traded stocks (currently about 60% US stocks and 40% international stocks),” he said.
The expert suggested downgrading the bonds to facilitate higher stock allocation. This change assumes that the 40-year-old has time to weather market volatility and benefit from equity growth.
real estate disagreement
Brock’s biggest departure from ChatGPT involved eliminating the real estate allocation altogether. “A portfolio with an 80% allocation to global equities has substantial exposure to embedded real estate assets,” he said.
Creating a separate allocation for real estate investment trusts is unnecessary, according to Brock. This challenges the conventional wisdom of adding REITs for diversification when broader stock indexes already include real estate companies.
gold fund switch
Brock agreed with maintaining gold’s performance but recommended switching from GLD to GLDM. The reason is simple: low cost. According to Brock, GLDM’s expense ratio is 0.05% versus 0.10% for GLD.
“It provides plenty of liquidity to retail investors,” he said of the low-cost option. A difference of 0.05% seems small but adds up significantly over decades.
liquidity reserve additions
Brock’s final recommendation added an element that was not included in the ChatGPT: establishing a 2.5% liquidity reserve through a competitive money market mutual fund. “This will give you some financial flexibility and a yield of 3.5% to 4.0%,” he said.
In other words, market declines create buying opportunities that dry powder investors can take advantage of.
Editor’s Note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including possible loss of principal. Always consider your individual circumstances and consult a qualified financial advisor before making investment decisions.