For those who have a diversified portfolio in a tax free account, I've come up with a method to automatically re-balance funds between TSLA and non-TSLA. Following this method takes the guesswork and stress out of stock price rises and falls and allows you to automatically profit off of the volatility. Oftentimes people panic when the stock drops and proceed to sell or get giddy and buy more when the stock rises. This is the exact opposite of a smart investment strategy.
This method allows you to automatically buy when the stock drops (increase leverage) and sell when it rises.(decrease leverage).
It's pertinent for anyone with any tax free account who has chosen to diversify between TSLA and other investments.
I'll explain it through an example:
Investor has:
IRA with $1.5M
1) They wish to follow a roughly 50/50 diversification between TSLA and SPYX (S&P 500 Index fund with fossil fuel stocks removed).
2) They are willing to sell SPYX as TSLA drops in order to acquire more TSLA shares
3) They wish to acquire more SPYX as TSLA rises for their rainy day fund (relatively safe investment).
So initial conditions in their IRA are:
1) 1000 shares of TSLA at $750 = $750k
2) $750k of SPYX.
They are willing to lower their SPYX to 40% of their portfolio on TSLA drops, but they'd like to increase the SPYX to over 50% as TSLA rises.
1) Sell enough of SPYX to have cash ready for a buy order. 30 TSLA at $725 = $21.75k
2) Set a buy order for 30 shares of TSLA at $725.00 / share ($25.00 below current market value)
3) Set a sell order for 29 shares of TSLA at $775.00 / share ($25.00 above)
Now assume TSLA drops to $725 and the 30 share buy order executes.
1) Sell more SPYX = $21k
2) Set a new buy order for 30 @ $700
3) Change the sell order to 29 shares @ $750
Now assume the stock returns to $750 and the sell order triggers
1) Reset the orders to $725 to $775.
2) Buy $21.75k of SPYX
Presto: In this scenario you just manufactured a new share of TSLA. By buying 30 shares and selling back at a $25.00 higher price, there's enough profit to purchase the share. That enables selling only 29 shares of the 30 that were bought.
As long as the stock keeps dropping, keep purchasing shares all the way down, knowing that the price will recover someday. On the way up, keep selling shares knowing that you are putting away more money in your "safe" index fund.
The keys are to pick your low value ($500 in this example) and your high value ($1000 in this example) and then picking a diversification that you would be happy with at the various prices.
n this example if the stock dropped straight to $500, you would acquire an additional 300 shares of TSLA on the way down. So assuming SPYX stayed flat your balance would be:
After a straight drop to $500:
Tesla shares = the original 1000 shares + 300 shares acquired at an average cost basis of $625 = $187.5k cost
Your current value of 1300 shares of TSLA at $500 = $650k
Your SPYX would be $750k - $187.5k = $562.5k
So now rather than a 50/50 diversification you would have
Tesla = $650k / ($650k + $562.5k) = $650k / $1.2125M = 53.6% TSLA
Assuming TSLA rose straight to $1000 the diversification would be:
Tesla shares = the original 1000 shares - 290 shares sold at $875 = $253.75k
SPYX = $750k + $253.75k = ~ $1M
So now rather than a 50% diversification you would have:
Tesla = $710k / 1.71M = 41.5%
The above calculations are for the worst case where there is no volatility and the stock plunges straight down or straight up. Whenever volatility results in a buy order followed by a sell order an additional profit ($25 * 30) = $750 in this example is generated (and also used to buy a share in this example).
A slight disadvantage is that at any given time a small percentage of the portfolio is sitting in cash (in this case the initial amount = $725 * 30 = $21.75k or 3% of the SPYX fund, so this would not be as appropriate for a slow moving non-volatile stock.
Note you can set up the as many sell orders at ever increasing prices as you'd like, so that on big gap ups, they trigger automatically. You can also set up as many buy orders as you'd like (at the expense of having more money sitting in cash) to execute the buy orders.
So in summary.
1) Pick diversification targets at TSLA lows and TSLA highs ($500 and $1000 in this example).
2) Pick delta values. In this example I picked a $50 moving window. Smaller windows would harvest more money, but would require more effort. It sure would be nice to have a program that does this automatically
3) Calculate the number of shares to buy as the stock drops and to sell as the stock rises such that you can meet your diversification targets. For simplicity I assumed a constant 30 share purchase and 29 share sell, but you could increase the number of shares purchased at each drop and decrease the number of shares sold during the rise. E.g. as the price approaches $500 you may want to be purchasing 40 shares (still roughly a $20k cost) or as the price approaches $1k you may want to only sell 20 shares (a roughly $20k transfer to SPYX)..
4) Set up your orders.
5) Print new shares or money
6) Feel less stress
This method allows you to automatically buy when the stock drops (increase leverage) and sell when it rises.(decrease leverage).
It's pertinent for anyone with any tax free account who has chosen to diversify between TSLA and other investments.
I'll explain it through an example:
Investor has:
IRA with $1.5M
1) They wish to follow a roughly 50/50 diversification between TSLA and SPYX (S&P 500 Index fund with fossil fuel stocks removed).
2) They are willing to sell SPYX as TSLA drops in order to acquire more TSLA shares
3) They wish to acquire more SPYX as TSLA rises for their rainy day fund (relatively safe investment).
So initial conditions in their IRA are:
1) 1000 shares of TSLA at $750 = $750k
2) $750k of SPYX.
They are willing to lower their SPYX to 40% of their portfolio on TSLA drops, but they'd like to increase the SPYX to over 50% as TSLA rises.
1) Sell enough of SPYX to have cash ready for a buy order. 30 TSLA at $725 = $21.75k
2) Set a buy order for 30 shares of TSLA at $725.00 / share ($25.00 below current market value)
3) Set a sell order for 29 shares of TSLA at $775.00 / share ($25.00 above)
Now assume TSLA drops to $725 and the 30 share buy order executes.
1) Sell more SPYX = $21k
2) Set a new buy order for 30 @ $700
3) Change the sell order to 29 shares @ $750
Now assume the stock returns to $750 and the sell order triggers
1) Reset the orders to $725 to $775.
2) Buy $21.75k of SPYX
Presto: In this scenario you just manufactured a new share of TSLA. By buying 30 shares and selling back at a $25.00 higher price, there's enough profit to purchase the share. That enables selling only 29 shares of the 30 that were bought.
As long as the stock keeps dropping, keep purchasing shares all the way down, knowing that the price will recover someday. On the way up, keep selling shares knowing that you are putting away more money in your "safe" index fund.
The keys are to pick your low value ($500 in this example) and your high value ($1000 in this example) and then picking a diversification that you would be happy with at the various prices.
n this example if the stock dropped straight to $500, you would acquire an additional 300 shares of TSLA on the way down. So assuming SPYX stayed flat your balance would be:
After a straight drop to $500:
Tesla shares = the original 1000 shares + 300 shares acquired at an average cost basis of $625 = $187.5k cost
Your current value of 1300 shares of TSLA at $500 = $650k
Your SPYX would be $750k - $187.5k = $562.5k
So now rather than a 50/50 diversification you would have
Tesla = $650k / ($650k + $562.5k) = $650k / $1.2125M = 53.6% TSLA
Assuming TSLA rose straight to $1000 the diversification would be:
Tesla shares = the original 1000 shares - 290 shares sold at $875 = $253.75k
SPYX = $750k + $253.75k = ~ $1M
So now rather than a 50% diversification you would have:
Tesla = $710k / 1.71M = 41.5%
The above calculations are for the worst case where there is no volatility and the stock plunges straight down or straight up. Whenever volatility results in a buy order followed by a sell order an additional profit ($25 * 30) = $750 in this example is generated (and also used to buy a share in this example).
A slight disadvantage is that at any given time a small percentage of the portfolio is sitting in cash (in this case the initial amount = $725 * 30 = $21.75k or 3% of the SPYX fund, so this would not be as appropriate for a slow moving non-volatile stock.
Note you can set up the as many sell orders at ever increasing prices as you'd like, so that on big gap ups, they trigger automatically. You can also set up as many buy orders as you'd like (at the expense of having more money sitting in cash) to execute the buy orders.
So in summary.
1) Pick diversification targets at TSLA lows and TSLA highs ($500 and $1000 in this example).
2) Pick delta values. In this example I picked a $50 moving window. Smaller windows would harvest more money, but would require more effort. It sure would be nice to have a program that does this automatically
3) Calculate the number of shares to buy as the stock drops and to sell as the stock rises such that you can meet your diversification targets. For simplicity I assumed a constant 30 share purchase and 29 share sell, but you could increase the number of shares purchased at each drop and decrease the number of shares sold during the rise. E.g. as the price approaches $500 you may want to be purchasing 40 shares (still roughly a $20k cost) or as the price approaches $1k you may want to only sell 20 shares (a roughly $20k transfer to SPYX)..
4) Set up your orders.
5) Print new shares or money
6) Feel less stress
