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Black Swan protection strategies

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kbM3

Active Member
May 22, 2017
2,250
13,816
Orlando
I am debating the best way to protect my retirement savings (mix of after tax, IRA and Roth) since I am over 100% invested in Tesla and very near retirement (am I the most aggressive bull here?).

I can still retire on 60% of my current holdings so I am considering setting up sell limits as follows:

Stock price is $335 as I write this.
Sell 50% of holdings when stock falls to 80% of current value ($268.00)
Sell 25% of holdings when stock falls to 70% of current value ($238.00)

This would leave me at 57.5% of my current holdings in stock and still have 25% of my current Tesla shares.

I am aware other strategies would be diversification or options, but I'm leaning towards the above.

Would love any feedback, links that might help or to hear other strategies people are pursuing.
 
I am debating the best way to protect my retirement savings (mix of after tax, IRA and Roth) since I am over 100% invested in Tesla and very near retirement (am I the most aggressive bull here?).

I can still retire on 60% of my current holdings so I am considering setting up sell limits as follows:

Stock price is $335 as I write this.
Sell 50% of holdings when stock falls to 80% of current value ($268.00)
Sell 25% of holdings when stock falls to 70% of current value ($238.00)

This would leave me at 57.5% of my current holdings in stock and still have 25% of my current Tesla shares.

I am aware other strategies would be diversification or options, but I'm leaning towards the above.

Would love any feedback, links that might help or to hear other strategies people are pursuing.

Sell 60% of current holdings now. Then you're covered regardless. Ride out any downs with the other 40%. Best case, the 40% will soon exceed the original 60% and you are double good. Worst case, you still have enough + whatever extra you have from selling the remaining 40%.

Not an advice.
 
Sell 60% of current holdings now. Then you're covered regardless. Ride out any downs with the other 40%. Best case, the 40% will soon exceed the original 60% and you are double good. Worst case, you still have enough + whatever extra you have from selling the remaining 40%.

Not an advice.
The advantage of your strategy is that in the worst case, I would still hold 40% Tesla instead of 25% in my plan. The downside I see is that in the event the stock never drops down to $268.00 and continues to grow at 30%+ / year (which I believe highly likely), my net worth would only be (Edit 40%)) in the long run comparatively. Is that correct?

I just have so much trouble selling shares in the $300s when I think there is a high probability the price will be over $1000 in 3-4 years.
 
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The advantage of your strategy is that in the worst case, I would still hold 40% Tesla instead of 25% in my plan. The downside I see is that in the event the stock never drops down to $268.00 and continues to grow at 30%+ / year (which I believe highly likely), my net worth would only be (Edit 40%)) in the long run comparatively. Is that correct?

I just have so much trouble selling shares in the $300s when I think there is a high probability the price will be over $1000 in 3-4 years.

The risk/ reward/ comfort level is all up to you. Your original post looked like a worst case, never recover approach (what if the sell trigger is just due to a dip?). If you reduce holdings to 40%, you are guaranteed the funds for retirement, but future earning are only 40% of what they would be (same for loses). That may be sufficient for your goals, just beware of over optimization/ FOMO (ie, wishing we'd sold at 380 both times). Best advice I can give: Pick a plan/ stategy you can be happy with and stick to it.


Can also look at options to increase the upside of increases while capping losses in case of drop, but I am not totally up to speed on that approach.
 
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The risk/ reward/ comfort level is all up to you. Your original post looked like a worst case, never recover approach (what if the sell trigger is just due to a dip?). If you reduce holdings to 40%, you are guaranteed the funds for retirement, but future earning are only 40% of what they would be (same for loses). That may be sufficient for your goals, just beware of over optimization/ FOMO (ie, wishing we'd sold at 380 both times). Best advice I can give: Pick a plan/ stategy you can be happy with and stick to it.


Can also look at options to increase the upside of increases while capping losses in case of drop, but I am not totally up to speed on that approach.
Thanks for the feedback! One of my fears is that I would not keep to my strategy because I am thinking it is just a temporary dip, when in reality it is not. To your point, it is important to determine a strategy ahead of time and not be swayed by emotion in the moment.
 
Thanks for the feedback! One of my fears is that I would not keep to my strategy because I am thinking it is just a temporary dip, when in reality it is not. To your point, it is important to determine a strategy ahead of time and not be swayed by emotion in the moment.

It's not easy. Something to consider is: If you sell on dip, do you ever repurchase? If so, will you manage to buy at a lower price (net gain), or higher (net loss compared to holding). The pain point really comes in if you need to convert to cash for life expenses. Early on I messed up and panic sold on a dip just after purchasing more (newbie and lack of sleep along with charts that zoom in make for poor decision making). We are working on basis that Tesla will succeed and, even if it doesn't, we like the thought that we tried to help it succeed (though one can debate whether our small non-IPO holding is helping much).
 
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Have you thought about converting your TSLA stock into 2022 TSLA convertible bonds? They give downside protection since you're guaranteed bond money back (less any premium you paid), plus you get almost all the upside as well if the stock does well. Only risk I see would be if Tesla went bankrupt and couldn't pay back bonds, but that risk is very small since stock would be wiped out first.
 
Have you thought about converting your TSLA stock into 2022 TSLA convertible bonds? They give downside protection since you're guaranteed bond money back (less any premium you paid), plus you get almost all the upside as well if the stock does well. Only risk I see would be if Tesla went bankrupt and couldn't pay back bonds, but that risk is very small since stock would be wiped out first.
Thanks for the response Dave. Do you know a good link or ref to learn more about them?

Edit: hold your response. I will Google myself and learn more about them And only come back if I have more questions.
 
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I hate to sell, when the price is low.

I found it prudent to have 3 years worth of expenses in an account which earns interest (or not nowadays). That will let me ride out any drawdowns. My experience is that setbacks in stocks usually last for less than three years.

So this 3 year nest egg saves me from selling, when stocks are far from ATH. I hate to sell, when the price is low.

And I do sell time value of options, thus generating some additional regular income (yes, you don't want to play options, but that's what I do).
 
I am debating the best way to protect my retirement savings (mix of after tax, IRA and Roth) since I am over 100% invested in Tesla and very near retirement (am I the most aggressive bull here?).

I can still retire on 60% of my current holdings so I am considering setting up sell limits as follows:

Stock price is $335 as I write this.
Sell 50% of holdings when stock falls to 80% of current value ($268.00)
Sell 25% of holdings when stock falls to 70% of current value ($238.00)

This would leave me at 57.5% of my current holdings in stock and still have 25% of my current Tesla shares.

I am aware other strategies would be diversification or options, but I'm leaning towards the above.

Would love any feedback, links that might help or to hear other strategies people are pursuing.

I probably couldn't hate this strategy more. Obviously I'm not giving professional advice here so you have to make your own call. But why not sell all of your shares, take the present value you're willing to allocate to Tesla (30%) and place that into 2020 leaps. You will get leverage so your returns are still quite high if tesla appreciates as you expect it to. If Tesla does not appreciate, youve defined your risk and you have a couple of years to realize your expectation. Of course, in the event that Tesla stays flat for the next couple years, you have lost the extrinsic value of your leaps which you will define by choosing a strike price.
 
Have you thought about converting your TSLA stock into 2022 TSLA convertible bonds? They give downside protection since you're guaranteed bond money back (less any premium you paid), plus you get almost all the upside as well if the stock does well. Only risk I see would be if Tesla went bankrupt and couldn't pay back bonds, but that risk is very small since stock would be wiped out first.

This is a fantastic suggestion as well.
 
Have you thought about converting your TSLA stock into 2022 TSLA convertible bonds? They give downside protection since you're guaranteed bond money back (less any premium you paid), plus you get almost all the upside as well if the stock does well. Only risk I see would be if Tesla went bankrupt and couldn't pay back bonds, but that risk is very small since stock would be wiped out first.
I like this idea, but haven't done much bond trading, and when I went looking a few months ago I couldn't find the Tesla bonds. What's the symbol?
 
These convertible bonds start to look interesting to me with all recent talks about inevitable recession, etc. Can anyone explain how they work with current prices? My understanding it is somewhat similar to an option with a protection of a bond. The question is how much you are paying (or giving away the upside) for the opportunity to convert with current market prices?
 
These convertible bonds start to look interesting to me with all recent talks about inevitable recession, etc. Can anyone explain how they work with current prices? My understanding it is somewhat similar to an option with a protection of a bond. The question is how much you are paying (or giving away the upside) for the opportunity to convert with current market prices?
I am learning more about them myself.

I don’t really have time this week, but I’m going to look more into it next week.
 
I hate to sell, when the price is low.

I found it prudent to have 3 years worth of expenses in an account which earns interest (or not nowadays). That will let me ride out any drawdowns. My experience is that setbacks in stocks usually last for less than three years.

So this 3 year nest egg saves me from selling, when stocks are far from ATH. I hate to sell, when the price is low.

And I do sell time value of options, thus generating some additional regular income (yes, you don't want to play options, but that's what I do).
This is precisely what I do as well.
The 2009 recession is instructive: equities in the US had fully recovered within four years.
So I keep four years' spending needs in ~cash, thereby enabling me to keep everything else in Ludicrous Mode in the equity markets.
And since I'm ~fully invested at all times, I too generate current income by selling put options to people at prices I'd be happy to take those particular stocks off their hands.

It's nice to know someone else executes the same investment approach, in this case an ocean away!
 
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I am learning more about them myself.

I don’t really have time this week, but I’m going to look more into it next week.
The 2022 convertible debt issuance that's been mentioned here a few times...
The bonds pay coupon interest at a fixed rate of 2 5/8%.
The bonds can be converted into stock at a conversion price of $327.50 per share (~3 shares per $1,000 face value bond).
The trick is that the bonds, if you can find some to buy, are currently selling not for $1000 per $1000 bond, but for roughly $1200 per $1000 bond. Why selling at a premium? Because of the stock conversion component of this debt instrument...TSLA stock is at $333 today, so you can see that there is built-in bullish sentiment related to the stock that is embedded in these convertible bonds selling for $1200 not $1000.
Naturally interest rate moves will also affect the price of these bonds, relative to their coupon interest rate.
And remaining life on the embedded equity option (four years and falling) also affects the market price of this bond.

All that said, it is an interesting play on Tesla, particularly if you can swoop in and buy some of these bonds when there's bad news in the market re Tesla. (3 month low on these bonds is 115% of par.) The time to get them is upon issue, by calling your broker and instructing them to find you some. These briefly traded at par and have been well north of par since.

Prospectus link:
FWP