Earning a second income from the stock market sounds great, but which shares should I buy to try and make this happen? To find out, I tried asking ChatGPT for some ideas.
Taking investment advice from a source with a well-documented hallucination problem seems a bit strange to me. But I have another issue with what I found.
The portfolio
I told ChatGPT I had 30 years before I needed to draw down income from the portfolio, which is what I’m currently estimating. Its suggestion was the following:
| Asset class | Portfolio weighting |
|---|---|
| Global equities | 35% |
| UK equities | 30% |
| Gilts | 10% |
| Corporate bonds | 10% |
| UK REITs | 10% |
| Alternative investments | 5% |
That’s pretty well-diversified. And it also suggested some well-known exchange-traded funds (ETFs) like the iShares Core FTSE 100 ETF for the UK equity part of the portfolio.
Things got more interesting, though, when I asked it about some specific names. One that it offered me was Legal & General (LSE:LGEN).
It’s easy to see why – it’s a well-established business and the stock has a high dividend yield. But I actually think the risks are quite high.
Legal & General
Investments go wrong in one of three ways. Either someone buys at the wrong time, sells at the wrong time, or the business makes less money than expected.
With Legal & General, this is complicated. In terms of buying and selling, there’s a lot to work out in terms of solvency ratios and the impact of market fluctuations on its balance sheet.
Ignoring these issues looks very risky. Sooner or later, there’s a good chance something makes the share price move sharply and I need to be able to figure out whether I should buy or sell.
If I can’t work that out, there’s a real danger that I’ll do the wrong thing, which could be a costly mistake. And that means me buying the stock involves a lot of unnecessary risk.
Dividends
Here’s an example of the kind of thing I have in mind: since 2022, Legal & General has paid out more in dividends than it has generated in earnings. That looks like a problem – but is it?
The answer is complicated. The company is currently well above its Solvency II capital requirements, so it can use the excess to fund investor returns without getting into trouble.
So far, so good. But the question for shareholders then becomes what happens to the firm’s Solvency II ratio if – for example – government bond prices fall sharply after the UK Budget.
That probably wouldn’t be good, but would it be a problem? I don’t know and this makes me think owning the stock in my portfolio is asking for trouble sooner or later.
Just ask ChatGPT?
Of course, I could just keep asking ChatGPT what to do every time something happens to the Legal & General share price. But aside from the potential for inaccuracy, what happens if ChatGPT stops being free?
That might seem unlikely, but OpenAI is losing money and needs to find $1.4trn to meet its spending commitments. This is why I think buying on the basis of AI advice is very risky.
With my own money, I’m sticking to investments that I can work out for myself. And even without technical or specialist knowledge, I think there are enough of them out there.
