[You are] forced to buy TSLA - and it may cost you 5% of your 401k

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
danaht
Posts: 632
Joined: Sun Oct 18, 2015 11:28 am

[You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by danaht »

Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
sambb
Posts: 2955
Joined: Sun Mar 10, 2013 3:31 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by sambb »

Im in total stock market. Ive probably ridden it up for years. Not really on my radar. However, conceptually, if you are opposed you can play options against the company, to negate the effect on your portfolio. Not my cup of tea, but easy to do with a brokerage acct.
Uniballer
Posts: 300
Joined: Thu Apr 20, 2017 9:55 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Uniballer »

Like many here, I am not holding any S&P 500 funds, but Total Stock Market funds (VTSAX or VTI). TSLA is already in there. Vanguard Large Cap (VLCAX or VV) also is already holding TSLA.
User avatar
Ramjet
Posts: 499
Joined: Thu Feb 06, 2020 11:45 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Ramjet »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
If it performs well you will reap the benefits

If it performs poorly it will be dropped from the S&P 500

There are 499 other companies in the fund, I don't see a problem at all
Last edited by Ramjet on Thu Nov 19, 2020 8:45 am, edited 1 time in total.
Valuethinker
Posts: 41395
Joined: Fri May 11, 2007 11:07 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Valuethinker »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Tech Media Telecomms might have been as much as 40% of the S&P 500 in 2000 at the peak. (Can't remember, but 30-40%). And even the stocks which later succeeded, hugely, like Amazon, spent 10+ years in the negative territory v their peak. Ebay anyone? Cisco? (FB & Google weren't even listed at that point, from memory FB hadn't even been founded - remember MySpace? Lycos?). Except for Apple (which had yet to launch the first iPhone) we'd have to say pretty much all those stocks were overvalued (Vodafone was over 15% of UK stock market, Nortel was over 25% of the Canadian index -- the former is now less than 4%, the latter went bust).

TSLA is one stock. The "Big 5" are c 20%?

The reality is those of us who were Tesla (stock) sceptics have been flat footed by the market. If the market proves to be incorrect about its valuation of Tesla in the long run, then index investors will ride it right back down.

But there's no reason to believe that all 500 are incorrectly priced, that the market has misunderstimated or overestimated, on average, the growth prospects of *all* of these companies. Thus that indexation would be a bad strategy in light of the market's general efficiency.

There is a weight of money & valuation argument about indexing. It seems to me that, over time, that creates greater opportunities on the arbitrage front - short sellers. That should tend to stabilise prices -- although I don't doubt we will see valuation bubbles.

There was a poster here who was very vocal about shorting Tesla, that it would go bust. "The market can remain irrational longer than you can remain solvent". I fear he fell victim to that truism.
User avatar
Nate79
Posts: 6519
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Nate79 »

Tesla is the largest holding in my extended market stock fund in my 401k which I hold in proportion with thr SP500 holding to be equivalent to the total stock market. This is a non issue.
User avatar
dogagility
Posts: 1123
Joined: Fri Feb 24, 2017 6:41 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by dogagility »

I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
Mike Scott
Posts: 1461
Joined: Fri Jul 19, 2013 2:45 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Mike Scott »

"I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?"

What's the cost to avoid it?
Like others, I'm in total stock market funds so I have gained some of the increase already.
dh
Posts: 512
Joined: Sun Mar 13, 2011 8:01 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by dh »

Mike Scott wrote: Thu Nov 19, 2020 9:01 am Like others, I'm in total stock market funds so I have gained some of the increase already.
:sharebeer "Buy the haystack." One of my favorite quotes.
User avatar
4nursebee
Posts: 1589
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by 4nursebee »

If you don't like the food at a restaurant, leave. Leave right away. Don't order or stay there and complain while chewing.
Pale Blue Dot
User avatar
birdog
Posts: 779
Joined: Fri Apr 07, 2017 1:35 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by birdog »

This article speaks directly to your concern.

https://awealthofcommonsense.com/2020/1 ... he-sp-500/
User avatar
anon_investor
Posts: 3710
Joined: Mon Jun 03, 2019 1:43 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by anon_investor »

Nate79 wrote: Thu Nov 19, 2020 8:47 am Tesla is the largest holding in my extended market stock fund in my 401k which I hold in proportion with thr SP500 holding to be equivalent to the total stock market. This is a non issue.
+1 and I hold VTSAX in my Roth IRA and taxable account, so all this Tesla being added to the S&P500 is just noise to me.
Prettyfrtnt
Posts: 217
Joined: Fri Aug 23, 2019 6:28 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Prettyfrtnt »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Got out of VOO huge position only choice in my employer supported limited retirement was VFTAX a vanguard ESG that mercifully has zoom and Tesla.
tibbitts
Posts: 12228
Joined: Tue Feb 27, 2007 6:50 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by tibbitts »

danaht wrote: Thu Nov 19, 2020 8:26 am What are your thoughts?
It's a non-issue for most people. If you don't have a total market fund and have the S&P500, you probably also have Extended Market in a roughly appropriate proportion.
burritoLover
Posts: 360
Joined: Sun Jul 05, 2020 12:13 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by burritoLover »

If you are so certain that you know TSLA is overvalued, then perhaps you should be trading in individual stocks rather than diversified index funds.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
jrbdmb
Posts: 552
Joined: Tue Oct 06, 2015 4:27 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by jrbdmb »

In IRAs and taxable funds where VTI / VTSAX (US Total Stock Market) are available I buy that. in my 401K which doesn't have US Total Stock Market fund I have their S&P 500 fund and Extended Market Index fund in proportions to recreate VTI. So Tesla's move is a don't care to me.

FYI, I briefly considered put options on Telsa back in the spring when it was around 900 (pre-split) - I thought the price was insane. I see now that quickly dismissing that idea was a good thing.
Escapevelocity
Posts: 259
Joined: Mon Feb 18, 2019 8:32 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Escapevelocity »

dogagility wrote: Thu Nov 19, 2020 8:48 am I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
Actually, it's not "you're". Grammar police fail :oops:
User avatar
Stinky
Posts: 5807
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Stinky »

birdog wrote: Thu Nov 19, 2020 9:44 am This article speaks directly to your concern.

https://awealthofcommonsense.com/2020/1 ... he-sp-500/
Great article.

It says that Tesla will likely be about 1% of S&P 500. Not 3-5% as mentioned by OP.
It's a GREAT day to be alive - Travis Tritt
02nz
Posts: 5665
Joined: Wed Feb 21, 2018 3:17 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by 02nz »

Escapevelocity wrote: Thu Nov 19, 2020 10:32 am
dogagility wrote: Thu Nov 19, 2020 8:48 am I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
Actually, it's not "you're". Grammar police fail :oops:
Yes it is. You're = you are. Your is the possessive, and incorrect as currently used in the subject line.

(I don't actually agree with the characterization that anyone is forced to buy TSLA, unless the S&P 500 fund is literally the only choice in their 401k, which I can't imagine.)
TravelGeek
Posts: 3835
Joined: Sat Oct 25, 2014 3:23 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TravelGeek »

Well, our 401k accounts are mostly a total bond market index (and some S&P500 index), so the portion of TSLA and any impact will be much smaller.

In our taxable accounts the bulk of domestic is Total Stock Market (plus a smattering of “legacy” S&P 500, value index and small cap index from my pre-BH days).

My days of worrying about (or shopping for) individual stocks are long over. The results just weren’t good enough.
Last edited by TravelGeek on Thu Nov 19, 2020 10:38 am, edited 1 time in total.
Chuck
Posts: 2147
Joined: Thu May 21, 2009 12:19 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Chuck »

The S&P 500 and 500 funds in general are obsolete. A relic from the time when buying every investable stock was impractical.
Escapevelocity
Posts: 259
Joined: Mon Feb 18, 2019 8:32 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Escapevelocity »

02nz wrote: Thu Nov 19, 2020 10:35 am
Escapevelocity wrote: Thu Nov 19, 2020 10:32 am
dogagility wrote: Thu Nov 19, 2020 8:48 am I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
Actually, it's not "you're". Grammar police fail :oops:
Yes it is. You're = you are. Your is the possessive, and incorrect as currently used in the subject line.

(I don't actually agree with the characterization that anyone is forced to buy TSLA, unless the S&P 500 fund is literally the only choice in their 401k, which I can't imagine.)
Um, what? He is referencing the possessive sense of owning a 401k! So, no it's not incorrect at all. Why would he say "it may cost you 5% of you are 401k?"
boosnark
Posts: 56
Joined: Thu Oct 08, 2020 8:31 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by boosnark »

danaht wrote: Thu Nov 19, 2020 8:26 am ... This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Not the same. Tesla is making a profit (for now, at least), hence the inclusion in the S&P 500. It may revert to the mean at some point, but that's the beauty of a passive index.
User avatar
Brianmcg321
Posts: 1042
Joined: Mon Jul 15, 2019 8:23 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Brianmcg321 »

Pretty much all large cap funds, except the 500 index already hold TSLA. That’s why their returns have been so good this year.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Chuck
Posts: 2147
Joined: Thu May 21, 2009 12:19 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Chuck »

Escapevelocity wrote: Thu Nov 19, 2020 10:39 am Um, what? He is referencing the possessive sense of owning a 401k! So, no it's not incorrect at all. Why would he say "it may cost you 5% of you are 401k?"
Best part of this thread... Will figure it out in 3... 2..... 1 .....
User avatar
nisiprius
Advisory Board
Posts: 42187
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by nisiprius »

The original posting is tendentious in many ways. It assumes:
  • Tesla Motors stock will constitute 3-5% of the S&P 500.
  • Bogleheads invest in an S&P 500 index fund, rather than a broad or total market index fund.
  • For people using an S&P 500 index fund, the effect of Tesla being added will be similar to the effect of Tesla going to zero or doubling in value--that is, an up or down similar to the entire percentage of Tesla in the index. With an emphasis on the idea that it "may" be down.
1) How do you figure Tesla is going to be "3-5% of the S&P 500?" Currently, it's 0.88% of the Vanguard Total Stock Market Index Fund. The S&P 500 is about 80% of the market so if it were in the S&P 500 today it would be about 0.88% of 80% = 1.1%. It's nowhere near 5%.

2) I'm not sure what choices are available in 401(k) funds. Certainly some Bogleheads invest in the Vanguard S&P 500 fund. Some supplement it by adding an extended market fund to bring it up to the total market. But the most common suggestion by far is the Vanguard Total Stock Market Index Fund. I've personally switched from the S&P 500 to Total Stock in the early 2000's, and that means that I have been owning Tesla stock since 2010.

3) If you think you know which stocks are good and which are bad, then, of course, you do not index. If you don't think you know and you wish to mirror the market, you take what the market gives you and you don't fuss because it happens to include some big stock you don't like.

Anyway, we have an hypothesis we can test.

Since the beginning of Total Stock there really hasn't been an awful lot of difference between the S&P 500 (orange) and Total Stock (blue):

Source

Image

danaht seems to be saying that at the time Tesla is added to the S&P 500, we will see a sharp, visible divergence in the performance of the two funds--and that it will be bad for the S&P 500 fund.

I don't think this is going to happen. I think a year from now, November 2021, the two curves will still be pretty much more or less on top of each other. I'll try to remember to come back and look a year from now.
Last edited by nisiprius on Thu Nov 19, 2020 11:05 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
02nz
Posts: 5665
Joined: Wed Feb 21, 2018 3:17 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by 02nz »

Escapevelocity wrote: Thu Nov 19, 2020 10:39 am
02nz wrote: Thu Nov 19, 2020 10:35 am
Escapevelocity wrote: Thu Nov 19, 2020 10:32 am
dogagility wrote: Thu Nov 19, 2020 8:48 am I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
Actually, it's not "you're". Grammar police fail :oops:
Yes it is. You're = you are. Your is the possessive, and incorrect as currently used in the subject line.

(I don't actually agree with the characterization that anyone is forced to buy TSLA, unless the S&P 500 fund is literally the only choice in their 401k, which I can't imagine.)
Um, what? He is referencing the possessive sense of owning a 401k! So, no it's not incorrect at all. Why would he say "it may cost you 5% of you are 401k?"
The very first "your" is the one that's incorrect. It should be "You're (= you are) forced to buy TSLA ..."

Regards,
The Grammar Police :P
checkyourmath
Posts: 63
Joined: Wed Nov 18, 2020 12:46 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by checkyourmath »

A strange thought get a strange comment.

It is better than GM or Ford being 5% of your 401k. I should take back my own comment because if GM was 5% of your 401k you wouldn't have to worry because they would just get bailed out by the government when their stock price gets too low. GM would actually be a better choice then!
Valuethinker
Posts: 41395
Joined: Fri May 11, 2007 11:07 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Valuethinker »

checkyourmath wrote: Thu Nov 19, 2020 11:22 am A strange thought get a strange comment.

It is better than GM or Ford being 5% of your 401k. I should take back my own comment because if GM was 5% of your 401k you wouldn't have to worry because they would just get bailed out by the government when their stock price gets too low. GM would actually be a better choice then!
When GM employed half a million Americans, once, that might have been true.

The GM bailout was not good for shareholders (99% diluted?) nor for bondholders (90% diluted). You can track the debates here where bondholders felt that had been hard done by and make your own judgement.

The US government drove a very hard bargain when it bailed out GM. Perhaps to the benefit of the affected workers and communities*, but definitely not to the historic providers of capital to the company. (To be clear, I favoured the bailout on macroeconomic grounds).

* it was explained at the time that the interconnectedness of the supply chains of the Big 3, with many parts suppliers in common, meant that if one went down, they all could go down.
Valuethinker
Posts: 41395
Joined: Fri May 11, 2007 11:07 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Valuethinker »

nisiprius wrote: Thu Nov 19, 2020 10:45 am

I don't think this is going to happen. I think a year from now, November 2021, the two curves will still be pretty much more or less on top of each other. I'll try to remember to come back and look a year from now.
It may be that a primary advantage then of holding TSM rather than S&P 500 index fund is tax-related?

Because the average holding period of a stock should be much longer in TSM, there should be fewer taxable events (distributions of capital gains)?
mervinj7
Posts: 1566
Joined: Thu Mar 27, 2014 3:10 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by mervinj7 »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Have you considering switching from a S&P 500 fund to a Total Market fund? That way, nothing will change in December for you. Also, Amazon is roughly 5% of the S&P 500 right now. Are you concerned that Tesla will be worth as much Amazon (3x bigger) in the next few weeks?
User avatar
anon_investor
Posts: 3710
Joined: Mon Jun 03, 2019 1:43 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by anon_investor »

Valuethinker wrote: Thu Nov 19, 2020 11:56 am
nisiprius wrote: Thu Nov 19, 2020 10:45 am

I don't think this is going to happen. I think a year from now, November 2021, the two curves will still be pretty much more or less on top of each other. I'll try to remember to come back and look a year from now.
It may be that a primary advantage then of holding TSM rather than S&P 500 index fund is tax-related?

Because the average holding period of a stock should be much longer in TSM, there should be fewer taxable events (distributions of capital gains)?
Not if you own Vanguard index mutual funds or index fund ETFs, they are able to avoid the capital gains distributions through the ETF structure (Vanguard's index mutual funds have an ETF shareclass that benefits from the ETF structure - this dual share class structure is patented so only Vanguard has it).
fyre4ce
Posts: 1042
Joined: Sun Aug 06, 2017 11:29 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by fyre4ce »

If you like the other 499 companies in the S&P 500, then open an account at a brokerage that offers $0 commissions stock trades and buy the other 499 directly. Or, buy a S&P 500 index fund and then short Tesla on the side to cancel it out.
HawkeyePierce
Posts: 1561
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by HawkeyePierce »

Some S&P500 funds began buying TSLA shares a while back when it became clear they were on a path to inclusion in the index.
donaldfair71
Posts: 637
Joined: Wed Mar 06, 2013 4:15 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by donaldfair71 »

Unlike a lot of people in the thread, an SP500 fund (FXAIX- Fidelity 500) is my largest holding. Not by choice, but because it is the only equity index fund in my 403b.

My reaction? It's noise. Could be a big or small deal, but it is out of my control either way.
milktoast
Posts: 318
Joined: Wed Jul 10, 2019 8:17 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by milktoast »

Nate79 wrote: Thu Nov 19, 2020 8:47 am Tesla is the largest holding in my extended market stock fund in my 401k which I hold in proportion with thr SP500 holding to be equivalent to the total stock market. This is a non issue.
I actually think this is the more interesting situation. As Tesla shifts from the extended fund to the SP500 fund, I guess my position in Tesla won't shift much.

But the companies shifting the other direction don't consume the entire value of Tesla. So I'll buy more of the other companies in the extended market. And to pay for Tesla, my SP500 fund will need to sell more than just the companies that are dropping off the bottom.

So the net impact on my portfolio is a small shift towards small caps...

In the end it doesn't matter. But it's still interesting to think about the juggling that must occur for investors that are using SP500+extended rather than VTSAX.
User avatar
whodidntante
Posts: 9230
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by whodidntante »

If the thought of being long TSLA ruins your breakfast, then simply calculate how much exposure you want to offset, and short that amount. You can either directly short the stock (your broker's interface will call this "sell short" or some variation of that) or you can create a synthetic short position. The most straightforward way to do that is to buy and roll puts.

You can cancel, dollar for dollar, whatever TSLA does and your portfolio will perform similarly to if Tesla did not exist minus costs. Don't forget that taxes are a cost. So no complaining when your short position gains 50k and you have to pay taxes on every penny.
Normchad
Posts: 1443
Joined: Thu Mar 03, 2011 7:20 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Normchad »

Folks are way too excited about Tesla. They get far more then their fair share of ink.

Nobody is forced to buy anything. If you don’t like them getting added to your fund, just get out if the fund.

I buy index funds because I want to own the index. I don’t have the time, skill, or inclination to evaluate all, of these companies. Rest assured, there are some trash companies in that index, and Tesla might be one of them. But we don’t know. And I don’t care. I’m buying the whole fetid haystack to get the needle. I understand a bunch of worthless hay comes with that.

The index also contains a bunch of companies that a lot of us would find morally objectionable for one reason or another. But we don’t have countless threads on that, and people switching to all cash to avoid something so objectionable.

Just get over it. Either you’re in or you’re out.
sassyseuss
Posts: 33
Joined: Fri Oct 02, 2020 7:30 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by sassyseuss »

If someone wants to own an ETF or index fund but doesn't want the same level of exposure to the largest companies (Apple, Microsoft, Amazon, Alphabet, Facebook, Alibaba, Berkshire Hathaway, TSM, Tesla, etc.), they could invest in an equal-weighted fund. That comes with its own risks of course, such as investing more heavily towards mid- and small-caps, portfolio turnover, and perhaps missing out on yet further gains those giant companies may still make.

I think an equal-weighted fund is a decent hedge against certain types of volatility and does offer a lot of potential growth through smaller companies, but it's hardly perfect.
Da5id
Posts: 2226
Joined: Fri Feb 26, 2016 8:20 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Da5id »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Fine by me. My US holdings are all TSM anyway.

If you think you know more than the market about TSLA, buy the S&P 500 and short TSLA. My uninformed *opinion* is that TSLA is overpriced based on hype. I'd not bet money on the value of my opinion, YMMV.
Ferdinand2014
Posts: 1731
Joined: Mon Dec 17, 2018 6:49 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Ferdinand2014 »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
Hyperbole. Nothing more. To "cost" your 401K 5%, you would need to be 100% S&P 500, TSLA would need to be 5% of the the S&P 500 and after inclusion TSLA would need to go to 0%. In addition, you would need the S&P 500 to allow it to go to 0 and replace it with nothing else on the way up not already included. As it stands now TSLA will be worth about 1% of the index.

https://www.fidelity.com/news/article/t ... 8I-OUSBS_1

"About a fifth of Tesla's shares are closely held by Chief Executive Elon Musk and other insiders, and since the S&P 500 is weighted by the amount of companies' shares actually available on the stock market, Tesla's influence within the benchmark will be slightly diminished, putting it in eighth place, just behind Johnson & Johnson , and equivalent to just over 1% of the index."
Last edited by Ferdinand2014 on Thu Nov 19, 2020 5:56 pm, edited 1 time in total.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
case_of_ennui
Posts: 48
Joined: Mon Aug 17, 2020 5:07 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by case_of_ennui »

sassyseuss wrote: Thu Nov 19, 2020 3:00 pm If someone wants to own an ETF or index fund but doesn't want the same level of exposure to the largest companies (Apple, Microsoft, Amazon, Alphabet, Facebook, Alibaba, Berkshire Hathaway, TSM, Tesla, etc.), they could invest in an equal-weighted fund. That comes with its own risks of course, such as investing more heavily towards mid- and small-caps, portfolio turnover, and perhaps missing out on yet further gains those giant companies may still make.

I think an equal-weighted fund is a decent hedge against certain types of volatility and does offer a lot of potential growth through smaller companies, but it's hardly perfect.
I was under the impression equal weighted funds generally perform pretty poorly. I just compared RSP (Invesco Equal Weighted S&P500 ETF) vs VFINX(Vanguard S&P 500) starting in 2004 and they're pretty much dead on the same return. Interesting how RSP took the lead after the GFC and held it until the COVID drop earlier this year.

Portfolio 1 is 100% VFINX. Portfolio 2 is 100% RSP.
Image
TIAX
Posts: 1370
Joined: Sat Jan 11, 2014 12:19 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TIAX »

OP, why do you not have an extended market index outside the 401(k)?
User avatar
TomatoTomahto
Posts: 11286
Joined: Mon Apr 11, 2011 1:48 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TomatoTomahto »

That’s the nature of index funds. I abhor FaceBook, but I’m not jumping through hoops to avoid its stock in my portfolio via TSM.
I get the FI part but not the RE part of FIRE.
susze
Posts: 186
Joined: Sun Jul 27, 2008 2:26 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by susze »

Interesting thing this time is that tesla is not part of the S&P 600 or S&P 400 midcap. I think usually a company is when added and sometimes they can move it into the index easier.
Hyperchicken
Posts: 430
Joined: Mon Mar 02, 2020 5:33 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Hyperchicken »

danaht wrote: Thu Nov 19, 2020 8:26 am ... Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. ...
Large cap funds already hold Tesla, and have held it for a while, because it's been large cap for a while.

What will be really interesting to see is whether the inclusion of Tesla into S&P 500 will cause any noticeable divergence between the performance of total stock market funds and the ones tracking S&P 500 index.
RubyTuesday
Posts: 478
Joined: Fri Oct 19, 2012 11:24 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by RubyTuesday »

If you really don’t like it, and you own the S&P, you could short TSLA to neutralize it’s impact to your portfolio. You could do a lot of other non-BH things while you’re at it! Seriously, if you index total market, you get total market.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
BogleFan510
Posts: 195
Joined: Tue Aug 04, 2020 2:13 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by BogleFan510 »

danaht wrote: Thu Nov 19, 2020 8:26 am Hi Bogleheads,

TSLA is going to enter the S&P 500 in December - and it will probably be 3% to 5% of the S&P 500. The stock keeps going higher everyday - so this number might get much larger by the time it enters it. Most of the 401k "large cap" funds will be forced to buy it at these inflated prices in order to follow the index. I don't like this. This stock reminds me of the outrageous valuations we had in tech stocks in 1999. I guess this is the price we pay to be a "passive" investors in the S&P 500. What are your thoughts?
What if Tessla becomes the worlds largest energy supplier and becomes 15% of the market cap? Wouldnt you be glad you held some?

Maybe diversify beyond the S&P to total world market.
jdb
Posts: 1674
Joined: Wed Dec 05, 2012 8:21 pm

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by jdb »

Each to his or her own. The Vanguard S&P 500 Fund is my primary index fund. I just bought more after finding out Tesla would finally be added to the index next month. About time in my opinion. Good luck.
marathonfi
Posts: 14
Joined: Thu Dec 05, 2019 8:34 am

Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by marathonfi »

Escapevelocity wrote: Thu Nov 19, 2020 10:32 am
dogagility wrote: Thu Nov 19, 2020 8:48 am I'm fine with owning any set of companies in the S&P 500.

(It's you're...)
Actually, it's not "you're". Grammar police fail :oops:
Is there some inside joke here that I missed?
Post Reply