Tesla’s stock has soared since 2020, leading to FOMO for those who didn’t invest when shares were much cheaper.
But aggressively buying Tesla and other stocks backed by entrepreneurs like Elon Musk isn’t a strong strategy for investors saving for long-term goals like retirement. What is a smart strategy is investing via a well-diversified portfolio with a long-term mindset — and you’ll still likely have exposure to popular growth stocks. For instance, you may not own Tesla stock directly, but if you own an S&P 500 index fund, Musk’s company is a larger part of your portfolio than you may expect. Here’s how you can map out your exposure to Musk’s companies and any other high-flying stocks.
1. Determine your current stock allocation
The first step is to review all of the stocks, exchange-traded funds (ETFs) and mutual funds in your account and determine how much of your portfolio is invested in these stocks. You can look at their top holdings and see if Tesla and other large tech stocks are on the list. If you have a fund that follows a benchmark like the S&P 500 or Nasdaq Composite, companies with large market caps take up more real estate. That means you will have more exposure to Tesla than smaller companies.
You don’t want to spend hours looking through hundreds of positions in your index fund. But you should pay attention to which stocks make up at least 1% of one of your total assets, keeping in mind that many experts say that if a stock is making up more than 5% of your portfolio, it’s considered a concentrated position.
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2. Set a limit
Younger investors with horizons that span years or even decades have more time to endure market corrections and sharp volatility. But when you are getting close to retirement, you may want to trim your exposure to growth stocks.
Capping your exposure to a single stock by a small single-digit percentage — like the aforementioned 5% — offers a balance. You get exposure to a stock that can generate significant returns, but if the price plummets, it won’t be a disaster for your retirement plan.
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3. Rebalance without emotion
The best investors use logic, rules and criteria to guide their investments. They do not rely on emotions, and they establish necessary guardrails to ensure they remain on target for retirement. You can periodically review your 401(k) plan and rebalance some of its holdings to reduce exposure to growth stocks like Tesla as your risk tolerance wanes.
The strategies that work for investors in their 20s and 30s don’t necessarily work when you are in your 50s and 60s. Trimming positions when they get above a certain percentage can ensure that you aren’t too concentrated in a single stock.
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4. Align with your retirement timeline
While many people like the thought of buying a single stock that takes off, most people can retire just fine by implementing a more boring investing strategy that aligns with their goals and time horizon.
Financial advisors tend to recommend retirees save up enough money in a liquid account like a savings account to cover one to two years’ worth of expenses. Then you can allocate your assets to bonds and stocks — including durable dividend stocks but also high-growth stocks — based on factors like your other sources of income, expenses and goals.
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