Without fail, the top search results over the last few weeks in our TrackstarIQ data bring up two familiar names…
Tesla (TSLA) and ARK Innovation (ARKK).
Cathie Wood’s ARK Innovation Fund holds popular names like Square (SQ), Roku (ROKU), and Zoom (ZM).
But its largest holding, at 11%, is Tesla.
So, which is a better buy?
That’s actually the wrong question.
The correct question is…
Which is a better buy for you?
And to answer that, we need to explore the three ‘whats.’
- What’s your goal?
- What’s your risk?
- What’s your reason?
What’s your goal
Each of us get into trading or investing for our own reasons.
Sometimes it’s wealth generation.
Maybe it’s retirement.
Whatever your reason, all goals need to have two elements – the what and by when.
Example: I want to have $2 million to retire by age 50.
Even if you’re a trader, you should be able to state something similar.
Example: I want to earn $5,000 each month.
One of the biggest mistakes new traders and investors make is jumping in without a plan.
A well-thought-out plan not only keeps you sane but on track to your goals. The plan doesn’t need to be complex, just contain the key elements.
What’s your risk
Risk is a function of three components:
- Your goal
- Progress towards that goal
- Time until the goal
Let’s go back to the example from earlier.
Example: I want to have $2 million to retire by age 50.
That statement takes an entirely different context-based upon your age and progress.
If you’re 40 and already at $1.9 million, chances are you don’t want to take excess risk.
But if you’re fresh out of college, you can afford to let time work for you.
Buying Tesla opens you to company-specific risks, both positive and negative.
If you invested in shares of the company way back in 2013, when no one knew if it would survive, you would be handsomely rewarded.
But that’s not always the case. Plenty of great companies collapse.
Buying an ETF spreads out your risk. But you give up some of that potential we just spoke about.
Trading and investing balance risk and reward.
ETFs aim to diversify company-specific risk.
What’s your reason?
Every trade, every investment…they all start from an idea.
That idea creates the foundation.
If you believe in Elon Musk, then buying ARK doesn’t necessarily fit your reason.
If you want exposure to upcoming technology companies, buying Tesla’s stock might be too specific.
Your reason doesn’t need to be highly technical. General ones work just fine.
But keep this in mind. Once your reason for the investment or trade is gone, it’s over.
It doesn’t matter if your reason is based on a chart or earnings.
Quite often, people hold onto positions after it goes against them, hoping it will turn around.
To use the poker phrase – know when to hold ‘em and when to fold ‘em.
Final thoughts
The exercise laid out here doesn’t just apply to choosing between two stocks, but even individual investments.
Try it out next time, even if it’s just in your head.
