Tesla vs. the S&P 500: Which Is the Better First Investment?

The recent headlines about Tesla (TSLA 4.96%) may have you thinking about kicking off your investing program with a stake in the electric carmaker. The company just completed a 3-for-1 stock split. Outspoken leader Elon Musk has predicted a massive production increase, from about 930,000 cars in 2021 to 20 million cars by 2030. And, despite some ups and downs, Tesla's stock price has grown from about $30 per share to nearly $300 per share since early 2020.

But do that rocky momentum and Musk's big vision justify Tesla as a first investment? The answer is probably no. For most new investors, the S&P 500 is a more suitable choice. Read on to find out why.

Diversification matters

Tesla is one stock, while the S&P 500 is a basket of more than 500 positions. While Tesla may have amazing growth prospects, it's still a single stock -- and owning one stock, even for a short time, is risky.

You can't eliminate the risk of losing money on your first investment. But you can and should minimize that risk through diversification.

To be clear, losing money on Tesla isn't the worst thing that can happen. It'd be a bigger and more expensive problem if the volatility of owning one stock dampens your enthusiasm to keep investing.

That's why the S&P 500 makes a better first investment than Tesla, or any single stock. The diversification spreads out your risk across different stocks and economic sectors, so that no one position can sap all your invested capital. The result should be lower volatility and an easier first investing experience.

How to invest in the S&P 500

You can invest in the S&P 500 by way of an exchange-traded fund (ETF) or mutual fund. ETFs can be the better choice if your budget is tight. The minimum buy on an ETF is a single share -- or less than that if your broker supports fractional shares on ETFs. Some mutual funds have minimum purchase thresholds of $3,000 or more.

Why invest in the S&P 500?

A share of an S&P 500 ETF provides exposure to the largest, most successful public companies in the U.S. That list includes Tesla, as well as Apple, Microsoft, Amazon, and Alphabet, the parent company of Google.

S&P 500 portfolios also self-adjust. If a company deteriorates to the point of being kicked out of the index, it'll drop out of your ETF's portfolio too. Even better, your ETF's portfolio will also roll in any new index constituents. When Tesla joined the S&P 500 in December 2020, for example, ETF shareholders automatically gained exposure to the electric carmaker.

Get Tesla through the S&P 500

There's no doubt Tesla has appeal as an investment -- especially if you love cars. Autonomous vehicles and robo-taxis could be the next big thing in the mature auto industry. So Tesla's progression and production ramp-up over the next several years should be interesting to follow.

Fortunately, you don't have to bank entirely on the carmaker to feel like a Tesla shareholder. The easier and safer route is to get your Tesla exposure through an S&P 500 fund. You can always add direct Tesla exposure later as you gain confidence in how the stock behaves.