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

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

Post by z3r0c00l »

marathonfi wrote: Thu Nov 19, 2020 5:16 pm
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?
Yes it's you're :D
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by LadyGeek »

I fixed the grammar in the thread title.

The OP can change the title further by editing the Subject line in Post #1.

(Thanks to the member who reported the post.)

Please stay on-topic.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by totality »

Hyperchicken wrote: Thu Nov 19, 2020 3:35 pm 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.
To me it seems like the opposite will occur? Including Tesla in S&P 500 will make S&P 500 funds MORE like total stock market funds, not less.

I think any divergence has already happened, and after this change they will track each other more closely.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Hyperchicken »

totality wrote: Thu Nov 19, 2020 5:40 pm To me it seems like the opposite will occur? Including Tesla in S&P 500 will make S&P 500 funds MORE like total stock market funds, not less.

I think any divergence has already happened, and after this change they will track each other more closely.
That's a good point, and that is what will probably happen. Which makes the point of this thread even more moot.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by wander »

No worry. Even Apple stocks occupy less than 1% in my portfolio.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TropikThunder »

susze wrote: Thu Nov 19, 2020 3:30 pm 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.
It's by far the largest holding at 4.97% in S&P Completion Index funds like Vanguard Extended Market VEXAX/VXF so I think it's a minor issue. The rest of the VEXAX Top 10 is only 5.03%, which shows how much TSLA dominates that index.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by TropikThunder »

I think it's more of an indication that the S&P500 follows a fundamentally flawed strategy of waiting until a company is large and successful before buying it. As in, don't buy the whole haystack, wait until one of the stalks grows enough for you to see it. If you own TSM, you have owned TSLA all the way up (or if you hold S&P500 + Completion index). Then again, TSM and S&P500 funds pretty much track each other, so maybe it's not a big deal after all.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by z06ray »

I have an ignorant question on the nuts and bolts of this.

Tesla joins s and p 500.... all future contributions a % of investment touches Tesla. What about money already in VTSMX? Does something have to be sold to buy Tesla? Or is this just all future money? Perhaps I am not explaining my question right but trying to wrap my head around it. And Tesla is just the example because it’s happening now. The question is generally speaking.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by 000 »

TropikThunder wrote: Thu Nov 19, 2020 7:13 pm I think it's more of an indication that the S&P500 follows a fundamentally flawed strategy of waiting until a company is large and successful before buying it. As in, don't buy the whole haystack, wait until one of the stalks grows enough for you to see it. If you own TSM, you have owned TSLA all the way up (or if you hold S&P500 + Completion index).
I agree. Ironically, the inverse of this strategy -- small cap value -- suffers from the problem of selling winners far too soon.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by TropikThunder »

z06ray wrote: Thu Nov 19, 2020 7:43 pm I have an ignorant question on the nuts and bolts of this.

Tesla joins s and p 500.... all future contributions a % of investment touches Tesla. What about money already in VTSMX? Does something have to be sold to buy Tesla? Or is this just all future money? Perhaps I am not explaining my question right but trying to wrap my head around it. And Tesla is just the example because it’s happening now. The question is generally speaking.
Minor point: VTSMX is a Total Stock fund, not an S&P500 fund, so it already contains TSLA. That said, when the S&P500 makes a change:
When one goes in another has to come out. The S&P 500 announced that Tesla would join the index on Dec. 21, but the index committee was mum on which stock Tesla would replace.
https://www.barrons.com/articles/tesla- ... 1605737923
The index change is immediate, but funds that track it generally take time to carry out the change-over, and start buying at undisclosed times ahead of the inclusion date (and start selling the soon-to-be-leaving stocks also). The idea is to prevent investors getting ahead of the index and running up the price, and to avoid price shocks if the fund changes happened all at once. But since it's been such an obvious next-step I don't think the funds' technique will help this time. It's just unavoidable that some portion of the fund purchase will be at significantly elevated price but it's unavoidable IMO.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by nisiprius »

z06ray wrote: Thu Nov 19, 2020 7:43 pm I have an ignorant question on the nuts and bolts of this.

Tesla joins s and p 500.... all future contributions a % of investment touches Tesla. What about money already in VTSMX? Does something have to be sold to buy Tesla? Or is this just all future money? Perhaps I am not explaining my question right but trying to wrap my head around it. And Tesla is just the example because it’s happening now. The question is generally speaking.
Tesla is already in Total Stock. And nothing needs to be done. The shares have already been bought. If Tesla increases in value, and becomes a bigger percentage of the stock market the fund doesn't need to do anything, the shares it already owns increase in value and become a bigger percentage of the fund. If Tesla declines in value and becomes a smaller percentage of the stock market, the fund doesn't need to do anything, the shares it already owns decrease in value and become a smaller percentage of the fund.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by stocknoob4111 »

so we're forced to buy this stock at a PE of 1000 :oops: This stock is analogous to the tulip bubble, nothing less. TSLA does not deserve to be added to the S&P 500 in my opinion because it has failed to be profitable consistently over many years and the stock price is purely fueled by ridiculous speculation. How can a stock with a PE of nearly 1000 be even considered seriously? I don't see what anyone can do about it, just the cost of doing business I guess.

Reasonable value of TSLA IMO is $50 (i.e. $250 before the split) and even at that price people were saying it was high but it was high because of the whole growth story etc. giving TSLA special status.

So, it had special considerations AT A PRICE OF $50 not $500 that it is currently. Also they pulled a fast one by doing a 1:5 stock split. Some people were too foolish to even understand what had happened.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by TropikThunder »

stocknoob4111 wrote: Thu Nov 19, 2020 8:12 pm so we're forced to buy this stock at a PE of 1000 :oops: This stock is analogous to the tulip bubble, nothing less. TSLA does not deserve to be added to the S&P 500 in my opinion because it has failed to be profitable consistently over many years and the stock price is purely fueled by ridiculous speculation. How can a stock with a PE of nearly 1000 be even considered seriously? I don't see what anyone can do about it, just the cost of doing business I guess.

Reasonable value of TSLA IMO is $50 (i.e. $250 before the split) and even at that price people were saying it was high but it was high because of the whole growth story etc. giving TSLA special status.
Did you not read any of the rest of the tread? It's a non-issue if you own Total Stock instead of S&P500, or if you included the Extended Market/Completion Index because then you would already have owned TSLA along it's rise.
stocknoob4111 wrote: Thu Nov 19, 2020 8:12 pm So, it had special considerations AT A PRICE OF $50 not $500 that it is currently. Also they pulled a fast one by doing a 1:5 stock split. Some people were too foolish to even understand what had happened.
Why do you think they did the 5:1 split? Share price isn't one of the inclusion criteria as far as I know.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by 000 »

stocknoob4111 wrote: Thu Nov 19, 2020 8:12 pm so we're forced to buy this stock at a PE of 1000 :oops: This stock is analogous to the tulip bubble, nothing less. TSLA does not deserve to be added to the S&P 500 in my opinion because it has failed to be profitable consistently over many years and the stock price is purely fueled by ridiculous speculation. How can a stock with a PE of nearly 1000 be even considered seriously? I don't see what anyone can do about it, just the cost of doing business I guess.

Reasonable value of TSLA IMO is $50 (i.e. $250 before the split) and even at that price people were saying it was high but it was high because of the whole growth story etc. giving TSLA special status.

So, it had special considerations AT A PRICE OF $50 not $500 that it is currently. Also they pulled a fast one by doing a 1:5 stock split. Some people were too foolish to even understand what had happened.
If you think the market doesn't appropriately price in stock splits, you probably shouldn't be in index funds at all.

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

Post by oken »

Tesla makes up about 0.5% of the Global Stock Market...
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by JoMoney »

I'm a S&P 500 index owner (and that's about it).
I'm not a fan of owning TSLA stocks, but I'm not changing anything. If I was concerned about having a more selective screen, on my index fund, I'd probably move to a dividend index like VYM (Vanguard's High-Yield Dividend Index) or VIG (Vanguard's Dividend Appreciation Index).
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by z06ray »

Thank you Tropik Thunder and Nisiprius!!
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by bluquark »

If it does turn out that S&P500 funds buy Tesla at the peak and then it crashes, that will become a cautionary tale about S&P500 and accelerate the transition to total market index funds. It might not be a very material event on the scale of the entire index, but given the high profile of the stock in financial news, it will stick in people's craw.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by oragne lovre »

nisiprius wrote: Thu Nov 19, 2020 8:07 pm
z06ray wrote: Thu Nov 19, 2020 7:43 pm I have an ignorant question on the nuts and bolts of this.

Tesla joins s and p 500.... all future contributions a % of investment touches Tesla. What about money already in VTSMX? Does something have to be sold to buy Tesla? Or is this just all future money? Perhaps I am not explaining my question right but trying to wrap my head around it. And Tesla is just the example because it’s happening now. The question is generally speaking.
Tesla is already in Total Stock. And nothing needs to be done. The shares have already been bought. If Tesla increases in value, and becomes a bigger percentage of the stock market the fund doesn't need to do anything, the shares it already owns increase in value and become a bigger percentage of the fund. If Tesla declines in value and becomes a smaller percentage of the stock market, the fund doesn't need to do anything, the shares it already owns decrease in value and become a smaller percentage of the fund.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by bluquark »

z06ray wrote: Thu Nov 19, 2020 7:43 pm I have an ignorant question on the nuts and bolts of this.

Tesla joins s and p 500.... all future contributions a % of investment touches Tesla. What about money already in VTSMX? Does something have to be sold to buy Tesla? Or is this just all future money? Perhaps I am not explaining my question right but trying to wrap my head around it. And Tesla is just the example because it’s happening now. The question is generally speaking.
VTSMX doesn't buy or sell anything because it doesn't track the S&P500, but if you meant an S&P500 fund like VOO, then what happens is when Tesla is added, another stock is fully sold off at the same time since this particular index always has 500 stocks. That sale will not raise enough cash to buy market weight of a large cap like Tesla, so a small fraction of every other stock in the fund will also be sold until 1.1% of the fund is invested in Tesla by the end of the reconstitution process.

See https://analystprep.com/cfa-level-1-exa ... ion-index/:
If a company in a market-capitalization index with a market capitalization of $15 billion at quarter-end will be replaced by a company with a market capitalization of $17.5 billion, what effect would the reconstitution have on the other companies within the index?

A. Allocations to other companies would decrease

B. Allocations would stay the same

C. Allocations to other companies would increase

Solution

The correct answer is A.

Since the company to be added has a higher market capitalization than the one being kicked out of the index, the new company will be weighted more heavily thus reducing allocation to all other companies within the index.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by mrspock »

I'd look up the phrase "Get out of your own way.", it would seem to apply in this situation. Not having TSLA in your 401k has cost most people far, far more than 5% compounded annually in the last few years.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by White Coat Investor »

sambb wrote: Thu Nov 19, 2020 8:34 am 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.
Exactly. I bought Tesla in 2010 shortly after the IPO. Looks like I bought it around $3 a share. That's a 100+ bagger! Beats me why anyone would use a 500 fund when a TSM fund is available.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by Northern Flicker »

OP, if you don't like acquiring stocks after they've become large cap stocks, why is your US stock exposure implemented by just holding an S&P500 fund?
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by danaht »

Very interesting replies. I think people made a very good case to own the total stock market index over the S&P 500 index. Unfortunately my 401k only has one index fund - which is the Vanguard S&P 500 Institution Fund. But at least this will only be a one time event - and probably in the big scheme of things - insignificant over time.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by JoMoney »

mrspock wrote: Fri Nov 20, 2020 1:57 am I'd look up the phrase "Get out of your own way.", it would seem to apply in this situation. Not having TSLA in your 401k has cost most people far, far more than 5% compounded annually in the last few years.
Vanguard's S&P 500 index (VFIAX) relative to Total Stock Market (VTSAX) since TSLA IPO 10 years ago...
Having or not having has made practically no difference, if anything the portfolio that didn't have it performed better for a variety of factors that would be near impossible to disambiguate (despite people having a million different reasons for each of their preferred 'story stocks'.)
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by whereskyle »

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

Post by mptfan »

anon_investor wrote: Thu Nov 19, 2020 9:46 am
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.
+2 I invest in the total stock market fund.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by bluquark »

bluquark wrote: Fri Nov 20, 2020 1:24 am what happens is when Tesla is added, another stock is fully sold off at the same time since this particular index always has 500 stocks. That sale will not raise enough cash to buy market weight of a large cap like Tesla, so a small fraction of every other stock in the fund will also be sold until 1.1% of the fund is invested in Tesla by the end of the reconstitution process.
Adding to this for completeness, most major fund providers provide an S&P extended index fund, which currently contains Tesla as its #1 holding, but will lose it at the same time as it joins S&P500. So to some extent, Vanguard will not need to do all of that buying and selling but simply twiddle with their internal accounting between their own funds. However, they will still need to do some buying and selling when they run out of internal accounting tricks.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by Northern Flicker »

danaht wrote: Fri Nov 20, 2020 8:29 am Very interesting replies. I think people made a very good case to own the total stock market index over the S&P 500 index. Unfortunately my 401k only has one index fund - which is the Vanguard S&P 500 Institution Fund. But at least this will only be a one time event - and probably in the big scheme of things - insignificant over time.
There must be small and midcap funds in the plan though.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by firebirdparts »

marathonfi wrote: Thu Nov 19, 2020 5:16 pm
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?
I’m certainly not seeing it. I’m seeing a grammar police fail fail.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TomatoTomahto »

firebirdparts wrote: Sat Nov 21, 2020 7:20 am
marathonfi wrote: Thu Nov 19, 2020 5:16 pm
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?
I’m certainly not seeing it. I’m seeing a grammar police fail fail.
I think dogagility was going after the “your” in the original thread title; criminal apprehended and reformed. Escape velocity zoomed past the title and examined the “your” in the last OP sentence and decided that “nothing happening here, move along.”

It was a case of a 911 call that didn’t specify the location of the accident.
I get the FI part but not the RE part of FIRE.
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by Valuethinker »

TomatoTomahto wrote: Sat Nov 21, 2020 7:34 am
firebirdparts wrote: Sat Nov 21, 2020 7:20 am
marathonfi wrote: Thu Nov 19, 2020 5:16 pm
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?
I’m certainly not seeing it. I’m seeing a grammar police fail fail.
I think dogagility was going after the “your” in the original thread title; criminal apprehended and reformed. Escape velocity zoomed past the title and examined the “your” in the last OP sentence and decided that “nothing happening here, move along.”

It was a case of a 911 call that didn’t specify the location of the accident.
Autocorrect has made a nightmare of my spelling. Autoincorrect one might call it.

It certainly does not understand the difference between it's its and its'
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Re: Your forced to buy TSLA - and it may cost you 5% of your 401k

Post by TomatoTomahto »

Valuethinker wrote: Sat Nov 21, 2020 8:54 am Autocorrect has made a nightmare of my spelling. Autoincorrect one might call it.

It certainly does not understand the difference between it's its and its'
It seems to be inserting “grocers’ apostrophes” (greengrocers’ apostrophes for you :D ) everywhere. It’s a PITA to correct since it always seems to assume that it got it right the first time, and sometimes it’s just not worth the effort.
I get the FI part but not the RE part of FIRE.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by nisiprius »

bluquark wrote: Thu Nov 19, 2020 10:19 pm If it does turn out that S&P500 funds buy Tesla at the peak and then it crashes, that will become a cautionary tale about S&P500 and accelerate the transition to total market index funds. It might not be a very material event on the scale of the entire index, but given the high profile of the stock in financial news, it will stick in people's craw.
In my opinion, it won't. Updating my math slightly:

As I write this, the top Google hit on "tesla market cap" shows a market cap of $464.10B, while the October 30th, 2020 S&P 500 factsheet for the S&P 500 index shows a total market cap of 505 x $56,491.32 = $28,528.116B, meaning that if Tesla were currently in the S&P 500 it would be 464.10 / (28,528.116 + 464.10) = 1.6% of the S&P 500.

So if Tesla were in the S&P 500 and its stock price instantly fell to zero, the S&P 500 would decline by 1.6%.

Choosing the year 2019, because 2020 had an unusual number of down days, I find that in 2019, there were 19 single-day drops of more than 1.6% in the S&P 500.

It wouldn't objectively be a big deal. Although, you're right, people looking for a stick to beat indexing with would probably say that it was. But they would probably say that even if Tesla doubled in price.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by michaeljc70 »

Ironic it is announced in the same week that Tesla placed 2nd to last in reliability according to Consumer Reports: https://www.usatoday.com/story/money/ca ... 337648002/

I don't hold S&P 500 funds (only TSM), but agree with most that this is not a big deal. I mean, there are terribly unprofitable companies in the S&P 500. Because they have lower valuations, does that make you want to own them? It is what it is.
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Re: [You are] forced to buy TSLA - and it may cost you 5% of your 401k

Post by stocknoob4111 »

TSLA has gained almost 700% year to date and is trading at a TTM PE of 1142.

Has this happened to any stock in the S&P 500 index before?

https://www.gurufocus.com/term/pettm/TS ... ottm/Tesla
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