Low-angle view of the facade of Tesla Motors dealership with logo and sign in Pleasanton, California, July 23, 2018. (Photo by Smith Collection/Gado/Getty Images)
This week’s mania around Tesla stock, which saw the share price of the automaker and sustainable energy company hit its biggest one-day gain in six years, likely has some investors feeling they should hop on that bandwagon.
The resounding response from financial advisors is that investors need to resist the urge to shovel money into the company.
“It’s 100% ‘FOMO,'” said Neela Hummel, a partner at Abacus Wealth Partners in Santa Monica, California, referring to “fear of missing out” anxiety. “People are afraid of missing the great jump.”
“Buying a single stock is not an investment strategy — it’s a wager,” she said.
On Tuesday, Tesla’s stock hit an intra-day record of $968.99 a share. More than 50 million shares changed hands — the most for a single day of Tesla trading.
The previous day, Tesla’s stock closed 19.9% higher, its biggest one-day gain in six years.
Some market analysts have cautioned that Tesla’s shares are overvalued and resemble a bubble, which could have disastrous consequences for investors if it implodes.
Barclays, for example, has a target price of $300 per share — well below its current level of around $750.
Analysts have an average 12-month price target of $495.04, according to FactSet.
“It very well could be [a bubble],” Hummel said. “It rhymes of Enron, various gold crazes and crypto — whether Bitcoin or Ethereum.”
Bitcoin, for example, had a run-up in price to around $20,000 in 2017, followed by a 65% crash the month after.
Investors seized by the Tesla mania appear to have rushed into the stock.
Traders on SoFi Invest — a stock and exchange traded fund investing platform used mostly by millennials age 25 to 40 — bought 20 times the amount of Tesla stock this week relative to history.
The top result in Google’s search engine after typing the words “Should I” is “should I buy Tesla stock,” suggesting that a large number of people are interested in getting a share of the company.
It’s 100% FOMO. People are afraid of missing the great jump.
partner at Abacus Wealth Partners
However, Tesla’s stock cratered Wednesday, dipping 17%, and hinted at the risk of chasing a hot stock.
“For those who just got in after a [big] increase, they’re out of luck because they just lost half of it,” said Philip Chao, chief investment officer at Experiential Wealth, based in Vienna, Virginia.
Tesla’s share price is still up around 82% since the beginning of the year.
How to diversify with Tesla
Investors should consider buying Tesla stock as part of a well-diversified portfolio of investments, according to financial advisors.
“The idea is: Don’t put all your eggs in one basket, but some eggs in many baskets,” Chao said. “Over time, you’ll get a better experience.”
Holding a single company’s stock is the least-diversified a portfolio can be — it’s like going to the casino and putting all your money on one number at the roulette table, Chao said.
Investors should also be wary of buying several stocks in one sector of the economy (such as auto or energy companies) and thinking they’re well-diversified by virtue of holding a bunch of stocks.
“Leading up to dot-com bust [in the early 2000s] people would say they were diversified because they had 30 stocks,” Hummel said. “They were all tech stocks. That’s hardly diversified.”
The best course of action for most investors who want Tesla stock is to buy a mutual fund or exchange-traded fund that invests in the company — such as a fund tracking a market index such as the Russell 1000 or the Nasdaq.
This strategy provides the benefit of diversification, since funds spread their investments among stock in several different companies and sectors, and makes it far more unlikely that an investor will lose a substantial amount of money.
Investors who want to buy an individual stock shouldn’t put more than 5% of their portfolio in it, Hummel said. They should also be wary of a double-dip effect: holding Tesla stock as well as a mutual fund investing in Tesla would boost your overall exposure to the company.
More from Personal Finance
Democratic presidential candidates take aim at a tax break for small businesses
Despite coronavirus fears, a fast recovery is predicted for your 401(k) plan
This small profession aims to fill a gap in the financial services world
And, investors should consider stocks as part of a broader portfolio of stocks and bonds. Younger investors typically have a larger exposure to stocks relative to older investors because they have a longer time horizon to retirement and can weather any market dips more easily. Older investors closer to retirement, however, typically have a greater share of bonds and cash, which are less volatile than stocks.
Ultimately, investors need to gauge their capacity for risk and ability to weather ups and downs.
“Are you able to stay the course? Knowing yourself is the single most important attribute in investing,” Chao said.