The Rise of the Machine Part I: How Machine Learning is Changing the Future of Investing
- Machine learning is a powerful concept with real-world implications for a wide range of industries, including finance.
- Machine learning-driven algorithms can analyze huge swathes of market data to deliver an investment strategy and execute trades in real-time.
- These programs are also capable of identifying risky portfolio assets and warn managers about potential impending danger.
In recent years, machine learning – once the stuff of science fiction, and now a reality – has emerged as a powerful tool that holds significant potential for numerous business and scientific disciplines, including finance and investing. Put simply, machine learning is the ability for a computer program to recognize patterns and produce desired outcomes by trial and error, with minimal human guidance or oversight.
Within the world of finance, machine learning offers investors the ability to make informed, data-driven decisions, as well as execute on those decisions via automated micro-transactions that occur so fast, human execution becomes impossible.
Put another way, machine learning offers investors the ability to define a goal, then task an algorithm with discovering the best way to reach that goal. The algorithm analyzes historical and contemporary market data and spits out a proposed strategy, executing specific trades according to the limits and parameters dictated by its human master.
Machine learning-driven algorithms also help investment firms identify – and ideally, proactively address – risks specific to a market or industry. The same process that allows a machine to suggest specific trades allows it to identify which portfolio assets may present risk or volatility based on historical data and market cycles.
Whether your goal is to execute data-driven trades that turn a profit or manage your risk quantitatively, machine learning-based algorithms will inevitably play a role in your day-to-day portfolio management. These programs can access and compute thousands of trades per second, far beyond what the human brain is capable of. It’s up to us to figure out the best way to put that incredible processing power to work.
In Part II of this blog series, we will look at the role of “Robo Advisors” within the world of finance, and help you understand how to best leverage our algorithmic friends to supplement your investment strategy.
There is no guarantee that an investment strategy will yield positive outcomes. Investing involves risk, including loss of principal. The advisors of Cypress Private Wealth are Registered Representatives with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Strategic Wealth Advisors Group, LLC, a registered investment advisor. Strategic Wealth Advisors Group, LLC and Cypress Private Wealth are separate entities from LPL Financial.