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Dec. 26, 2020, 4:32 p.m. EST

What Tesla now means for your 401(k)

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By Brett Arends

Congratulations! If you hold an S&P 500 index fund in your 401(k), IRA or other retirement accounts, on Monday you just bought a whole bunch of Tesla stock.

But only after it had already risen 19,000%.

Oops.

Crazy? Maybe. But that’s how index funds roll.

Elon Musk’s high-risk, futuristic empire has at last joined the S&P 500 stock index /zigman2/quotes/210599714/realtime SPX -0.54% , and that means every fund that tracks the index just had to go out and buy the stock regardless of price, valuation or risk.

We’re not talking petty cash, either. Tesla accounts for about 1.7% of the index by value.

Your S&P 500 or “large cap” index fund now has nearly as much of your retirement money invested in Tesla as it does in real estate or energy stocks.

Never mind that the easy money in Tesla has already been made, by people other than you. The stock went public just over 10 years ago, at $3.40 (in today’s money).

The peak price on Monday? Oh, about $700. (It then fell 6%.)

Index funds have a lot to recommend them, which is why they are so popular. Their fees are typically very low, because you don’t have to pay some overpriced MBA to pick the wrong stocks. They also tend to cost you less in taxes, because they don’t do a lot of buying and selling.

The downside is that a fund that tracks an index like the S&P 500 has to own every stock in the index, regardless of valuation.

Furthermore, the standard index funds don’t invest in all 500 stocks equally. They are what is called “capitalization-weighted,” which means that they put more money in the stocks that are already the most expensive, and the least in the stocks that are least expensive.

Your S&P 500 index fund isn’t betting almost 2% of your money on Elon Musk because they respect the man or the company, but because Tesla is now “valued” on the markets at more than $600 billion.

The more a stock price goes up, the bigger the “market value” of the company. And that means it becomes a bigger part of the index, and a bigger part of every index fund.

So index funds bet the most amount of money on the stocks that have already risen a long way. It’s not the “buy low, sell high” philosophy you might normally expect from an investment manager.

Right now 23% of every S&P 500 index fund is invested in just six highflying tech companies: Apple /zigman2/quotes/202934861/composite AAPL -4.17% , Microsoft /zigman2/quotes/207732364/composite MSFT -1.82% , Amazon /zigman2/quotes/210331248/composite AMZN -1.62% , Facebook /zigman2/quotes/205064656/composite FB -3.39% , Tesla /zigman2/quotes/203558040/composite TSLA -5.84% and “Alphabet” (Google) /zigman2/quotes/205453964/composite GOOG -4.00% . No, really. Those companies account for about a quarter of your fund.

That’s more than its entire investment in the energy, real estate, materials, utilities and consumer staples industries…put together.

/zigman2/quotes/210599714/realtime
US : S&P US
3,821.35
-20.59 -0.54%
Volume: 2.99B
March 8, 2021 5:05p
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 116.36
-5.06 -4.17%
Volume: 153.69M
March 8, 2021 4:00p
P/E Ratio
31.46
Dividend Yield
0.70%
Market Cap
$2038.41 billion
Rev. per Employee
$1.86M
loading...
/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 227.39
-4.21 -1.82%
Volume: 35.04M
March 8, 2021 4:00p
P/E Ratio
33.86
Dividend Yield
0.99%
Market Cap
$1746.78 billion
Rev. per Employee
$877,393
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 2,951.95
-48.51 -1.62%
Volume: 4.17M
March 8, 2021 4:00p
P/E Ratio
70.70
Dividend Yield
N/A
Market Cap
$1510.93 billion
Rev. per Employee
$297,430
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 255.31
-8.97 -3.39%
Volume: 18.36M
March 8, 2021 4:00p
P/E Ratio
25.27
Dividend Yield
N/A
Market Cap
$752.58 billion
Rev. per Employee
$1.47M
loading...
/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 563.00
-34.95 -5.84%
Volume: 51.32M
March 8, 2021 4:00p
P/E Ratio
895.64
Dividend Yield
N/A
Market Cap
$573.94 billion
Rev. per Employee
$445,694
loading...
/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 2,024.17
-84.37 -4.00%
Volume: 1.64M
March 8, 2021 4:00p
P/E Ratio
35.50
Dividend Yield
N/A
Market Cap
$1417.47 billion
Rev. per Employee
$1.35M
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