Though Tesla (TSLA 3.10%) is less than 20 years old, it's already regarded as an industry leader, paving the way for a more sustainable future. And it's found plenty of investors willing to sink their savings into its stock in the hopes of making a fortune.
While it has a lot of potential, that doesn't mean it's a great investment for everyone. If you're thinking about investing some of your retirement savings in the stock, you need to do these three things first.
1. Decide if investing in Tesla is right for you
It's usually unwise to invest in companies whose business models you don't understand. When you don't know how a company makes its money, you'll have a harder time gauging how its business decisions are likely to affect its share price. This could cause you to miss out on warning signs that someone more well versed in the industry would easily notice. If you're going to invest in Tesla, you need to understand how the company operates, where its money comes from, and what its long-term goals are.
You also need to make sure it fits in with your investing goals. If you're nearing retirement and are looking for dividend stocks to provide you with a supplemental income source as you age, Tesla wouldn't be a good fit because it's never paid dividends to its shareholders.
Finally, you have to make sure you're not putting all your eggs in one basket. If you've invested in other automakers and renewable energy companies, you may be able to capitalize on those industries' growth without adding Tesla to your portfolio. You'd be better off investing your money in other sectors you don't own stocks in to reduce the effect that any single sector has on your savings.
2. Find a retirement account that will allow you to invest in individual stocks
Most 401(k)s don't give you the ability to invest in individual stocks, so if you hope to invest your retirement savings in Tesla, you'll need a different account. An IRA is probably the simplest option for most people. You can open one with any broker and invest in just about anything you want. You can also decide if you'd rather pay taxes now in order to enjoy tax-free withdrawals in retirement or take a tax break today, if you'd rather pay taxes later.
Some 401(k)s have self-directed brokerage windows. If yours offers one of these, you may be able to invest in Tesla directly through your 401(k). You could also invest in individual stocks through a self-employed retirement account, like a solo 401(k) or a SEP-IRA if you own your own business.
Research all the options that are available to you and decide which makes the most sense for you right now. Focus on the investment options, contribution limits, and fees associated with the account you're considering. You can always roll your money over to a different account later if you decide you don't like where you're at, but it's easier if you just choose the right retirement account from the beginning.
3. Decide how much to invest in Tesla
Once you're ready to invest in Tesla, you have to decide how much of the stock you're going to purchase. Portfolio diversification is an important factor to consider. You don't want too much in a single company or sector, as discussed above, or else you put yourself at risk of huge losses. This is especially problematic when you're talking about your life's savings.
You also don't want too much of your money in stocks. While they have greater earning potential, they're more volatile. This can prove dangerous for retirees and older adults nearing retirement.
A good rule of thumb is to invest 110 minus your age in stocks. That means a 50-year-old should have 60% of their savings in stocks and 40% in bonds. If you're 50 and already have more than 60% of your savings in stocks, you should either sell some of your existing stocks to make room for Tesla or invest more money in bonds to keep your asset allocation where you want it to be.
Share price will also limit how much you can afford to invest in Tesla. A single share is trading for over $625 at the time of this writing, which could be problematic for those with only a few hundred dollars to invest.
Fractional shares are a viable alternative for those who can't afford to purchase a full share. Not all brokers allow you to purchase fractional shares of a stock, though, so this is something to keep in mind when deciding where you want to house your savings.
It's up to you to determine if Tesla is a good fit for your retirement portfolio and how much you'd like to invest in it. Even if you ultimately decide not to, keep these principles in mind when looking at any individual stock. And remember, what's right for you now may not be what's right for you in a few years. Revisit your retirement portfolio periodically to decide if you'd like to move any of your money around to better fit your retirement goals.