There's no doubt about it: Tesla (TSLA 2.57%) is one of the hottest properties in the stock market, and investors love it. The stock was up 695% in 2020, making many long-term holders very rich in the process.
But 2021 has told a different story. In the past few days, Tesla has seen a massive pullback, and at one point on Tuesday, it was down 13%. Even though tech stocks, in general, were selling off, the company's drop was much steeper -- a definitely bearish sign. But during the massive drop, Cathie Wood, a raging Tesla bull, bought another $120 million worth of shares for her Ark Innovation ETF -- and it had already been 10% of her fund.
Long-term investors know that buying a stock during a dip is a great way to begin or add to a position in a company, and the recent reduction in Tesla's stock price is making that tempting. Is now a good time for investors who've been drooling over the stock to jump in and take a bite?
Tesla car on production line. Image source: The Motley Fool.
Tesla's prospects
From the company's point of view, the future is definitely bright. Management thinks it can increase deliveries year over year at a rate of 50% and can see 50% annual growth for many years to come, as profitability will continue to improve.
Tesla fell just short of delivering the 500 vehicles it promised in 2020, but that still was very impressive considering the disruption of the COVID-19 pandemic. And it's riding the high of having five consecutive profitable quarters in a row.
There are so many reasons to believe in Tesla. It's the first mover in the global electric vehicle (EV) market (where all leading car manufacturers are currently playing catch-up) and a significant player in the autonomous ride-sharing market. It's even taken a position in the cryptocurrency market by investing $1.5 billion in Bitcoin.
And of course, six months ago, Tesla did a five-for-one stock split, which made it more affordable for everyday investors to purchase shares. If you're interested in picking some up, it's not hard to see why.
Safe ways to invest in Tesla now
All these facts will probably serve to whet your appetite even more if you've been considering taking a position. If that's what you'd like to do, there are several ways to do it without risking too much of your money.
After all, Tesla's stock price has perfection priced into it -- everything must go according to plan to justify its nosebleed valuation, and if something doesn't go smoothly (which is more than likely somewhere along the way), the stock could take a huge hit and come back down from the stratosphere.
The first option is to build your position slowly. Identify the amount of money you'd like to invest, and then make a plan as to how you'll buy your shares. One way is to divide it into three parts and establish a period of time over which you'll make purchases.
For instance, if you want to invest $15,000, you could plan to buy $5,000 worth of Tesla every three months. This will allow you to take advantage of lower prices, if they occur. And if they continue to rise, your incremental buys will average out, so some of your shares will be bought at lower cost.
Make it part of a diversified portfolio
If you're managing your portfolio yourself, you'll want to have a variety of different asset classes and industries in order to minimize your risk. Do you have a percentage of your portfolio dedicated to high-growth, high-risk opportunities? Then you can use that money to purchase Tesla stock. You can afford to take that risk because, as part of a well-balanced portfolio, it won't have a devastating effect if the stock doesn't perform as well as expected.
On the other hand, if the stock continues to soar, it will just become a larger part of your portfolio, and the only problem you'll be faced with is figuring out how to rebalance because you're making so much money from this one investment. That's not a bad problem to have.
Just a little nibble
Finally, if you really want a piece of the action but are fearful, there's no reason you can't buy a small amount of Tesla stock. Determine how much money you'd like to spend, and buy as many shares as you're able. Since most brokers now allow customers to buy fractional shares, you can buy as much as your dollar amount will allow -- even if it's not whole shares.
Once you're following the stock, you'll know when it dips, and you can take advantage of opportunities to nibble some more. Of course, it's important to watch the news and make sure the company is performing according to expectations -- but if it doesn't and the stock drops, your small ownership position won't negatively overwhelm your investment returns.
Tesla is a remarkable company with a unique leader in Elon Musk. If you have the stomach to endure the stock's fluctuations, you'll likely receive a handsome payoff -- as long as you have a long-term horizon. Purchasing shares as part of a balanced portfolio will mean you're unlikely to get too burned if the stock price craters. But if you have the appetite and guts to invest in a groundbreaking company, enjoy the meal. It definitely has the possibility of turning into a feast of profits one day.
