Best way to 'deselect' a stock from an index?

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PolarBearMarket
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Best way to 'deselect' a stock from an index?

Post by PolarBearMarket »

Hi All-

I've been thinking lately about the best way to 'opt out' of a large stock in an index and would like to hear your input.

The stock in question for me is Tesla. I did a quick portfolio review and based on our holdings of VTSAX and other indices, I estimate we are holding ~$8,000 of Tesla stock. I am just... not interested in having that level of exposure to Tesla. I won't pretend to know more about Tesla than the market, so just call it my personal speculative bet. I personally don't like holding so much of something where the value seems to be driven as much by memes and tweets as by fundamentals. Yes, everything in the stock market is driven by speculation, but this feels like an extreme case given its outsized position in my portfolio.

(Part of what got me thinking about this was the article from Matt Levine: https://www.bloomberg.com/news/newslett ... -500-index)

The only options I have come up with are:
  • Sell short Tesla stock - normally the argument against this is that I would not be able to stay solvent as long as the market can stay irrational, but in this case I already have exposure to the upside of the asset; I am just negating that position. Main downside I see is the complexity of managing a short position that stays consistently aligned with my exposure from index funds.
  • Build my own index by buying all the stocks separately - this seems like a HUGE and expensive hassle to avoid one stock, which is the the whole reason index funds are attractive in the first place.
Anything I am missing?
Silk McCue
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Re: Best way to 'deselect' a stock from an index?

Post by Silk McCue »

PolarBearMarket wrote: Wed Oct 27, 2021 7:21 am

Anything I am missing?
Yes you are missing something. You are over complicating your investing life by being concerned over an $8000 holding in one stock in broadly diverse fund that hold thousands of stocks.

Regardless of how you feel about one stock which is a small percentage of your holdings it is not worth the complication to scratch your itch. The antithesis of Boglehead investing.

Cheers
Dave55
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Re: Best way to 'deselect' a stock from an index?

Post by Dave55 »

Best way to opt out is to buy an ETF or actively managed fund that does not hold the stock or stocks you do not wish to hold. Or simply create your own portfolio of stocks that you wish to hold.

Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
Tanelorn
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Re: Best way to 'deselect' a stock from an index?

Post by Tanelorn »

You can just short that number of dollars / shares assuming you upgrade to a margin account. TSLA is liquid and easy to borrow, so any costs you’d incur would be minimal (this isn’t true for popular shorts, but after recent years, there are hardly any Tesla shorts left standing). But be aware you could be net short a rapidly rising stock with no offsetting long side exposure if your funds decide to sell Tesla and don’t bother to tell you / you don’t notice. If you’ve got indexes, that’s probably less of an issue. I’d hold the short at the same broker where you hold a much larger fund position so you wouldn’t have to worry about margin issues from price fluctuations in TSLA stock.
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ClevrChico
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Re: Best way to 'deselect' a stock from an index?

Post by ClevrChico »

Consider it noise and don't worry about it.

There were similar misgivings about holding Facebook when it went public. At the time, they didn't even have a mobile app. Owning FB via VTSAX has worked out well.
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calmaniac
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Re: Best way to 'deselect' a stock from an index?

Post by calmaniac »

Direct index investing.

You essentially create your own index. Seems like whatever theoretical advantage will be lost in fees, added complexity, and increased tendency to tinker. Keep it simple.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
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CyclingDuo
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Re: Best way to 'deselect' a stock from an index?

Post by CyclingDuo »

PolarBearMarket wrote: Wed Oct 27, 2021 7:21 am Anything I am missing?
Buy one and have fun driving it. :beer
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JoMoney
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Re: Best way to 'deselect' a stock from an index?

Post by JoMoney »

- More bonds so stocks in general (that all have various issues and risks) make up less of ones portfolio
- More international up to global cap weights so any individual stock makes up an even more trivial fraction of the equity portfolio
- Large Value and/or Dividend tilt
- Use a passive individual stock portfolio, and deal with additional hassle of managing a portfolio of individual stocks, tracking error, and possibly some behavioral issues when you get lots of pieces to play/trade/"rebalance" with and start have other feelings or opinions about individual companies :annoyed
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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arcticpineapplecorp.
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Re: Best way to 'deselect' a stock from an index?

Post by arcticpineapplecorp. »

there have been lots of posts already about deselecting stocks, making the index better and how skewed it is to a sector (like tech).

Here's one such post that discusses overweighting in certain stocks or sectors and why your attempt at recreating the index is a solution in search of a problem (source: viewtopic.php?f=10&t=359624):
RetiredAL wrote: Thu Oct 07, 2021 12:56 pm
mayurgai wrote: Wed Oct 06, 2021 7:01 pm FAANG stocks make up the top 15% of holdings in VTI. If the tech sector gets hammered, it will drag down VTI with it. How would you call this diversification ? Does it still make sense given tech sticks are overvalued ?
OP - some reference:
**************************************************
Twenty years ago, the five largest public companies by market capitalization were General Electric (GE), Microsoft (MSFT), Exxon Mobil (XOM), Walmart (WMT) and Pfizer (PFE). Today, only one of those companies (Microsoft) cracks the list.

Ten years ago, Microsoft and Exxon were still there, along with hard-charging Apple (AAPL), International Business Machines (IBM) and Chevron (CVX). Today, Apple and Microsoft remain, but the other three aren’t even among the 30 most valuable public companies in the world.

In 2021, the FAANG stocks (Facebook (FB), Amazon (AMZN), Apple, Netflix (NFLX), Google (GOOG)) reign supreme, accounting for about 15% of the S&P 500. More often than not, as they go, so goes the stock market. And it seems like it’s been that way forever.

Source: https://cabotwealth.com/daily/growth-st ... ng-stocks/
***************************************************

The beauty of the VTI index is that it will automatically shift towards the new top stocks, without you worrying about "did I pick the right one(s)".
i was going to post something very similar. You can see there were about 6 or 7 dominant market cap companies in 1994:
General Motors
Ford
Walmart
Exxon
General Electric
IBM
Citigroup

Oh how that changed over the next 24 years:

24 Years of Big Company Change

Over that same time period 1994-2018 how would your total stock market have done?

Image

you would have had 8.6 times your original investment even though half of those big companies were much smaller (IBM wasn't even on the list in 2018, fell off right before the end of the year).

also this:

https://youtu.be/kfMFDcuDKYA

Back to 1980 and S&P 500 rather then Fortune 500.

so the moral of the story is VTSAX and chill.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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burritoLover
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Re: Best way to 'deselect' a stock from an index?

Post by burritoLover »

The antithesis of large cap growth stocks like Tesla would be a small cap value stocks - tilting to this via adding a small cap value ETF like Avantis AVUV would make your portfolio less concentrated in large cap growth stocks. Focusing just on reducing risk on one specific stock such as Tesla is a bad move - you then play the role of active manager which hardly ever works long-term for really smart professionals getting paid millions, let alone random regular dude managing his own portfolio.
Yarlonkol12
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Re: Best way to 'deselect' a stock from an index?

Post by Yarlonkol12 »

I'm waiting for Direct Indexing products to become available, Vanguard and Blackrock are working on offerings
My posts are for entertainment purposes only.
Gundy
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Re: Best way to 'deselect' a stock from an index?

Post by Gundy »

Just build your own "index". Buy individual stocks. That's what I do (since 1994).

It's not hard to beat the S&P if you have the discipline to hold for decades and the ability to think independently.

Contrary to what you read around here, it ain't gambling.
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crake
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Re: Best way to 'deselect' a stock from an index?

Post by crake »

Looking at the composition of Vanguard Total Stock Market (VTSAX ), Tesla makes up 1.4% of the index. https://investor.vanguard.com/mutual-fu ... d-holdings

If Tesla instantly went to zero it would be an unnoticeable blip in the lifetime trajectory of your portfolio. This is also something which is very unlikely to happen. Your best option is to not worry about things like this.
hoofaman
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Re: Best way to 'deselect' a stock from an index?

Post by hoofaman »

crake wrote: Wed Oct 27, 2021 8:48 am Looking at the composition of Vanguard Total Stock Market (VTSAX ), Tesla makes up 1.4% of the index. https://investor.vanguard.com/mutual-fu ... d-holdings

If Tesla instantly went to zero it would be an unnoticeable blip in the lifetime trajectory of your portfolio. This is also something which is very unlikely to happen. Your best option is to not worry about things like this.
The holding hasn't adjusted for TSLAs current market cap, it's going to be about 2% going forward based on current market cap of 1T. Not that 2% is a huge allocation, but just sayin
DVMResident
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Re: Best way to 'deselect' a stock from an index?

Post by DVMResident »

Duplicate
Last edited by DVMResident on Wed Oct 27, 2021 11:22 am, edited 1 time in total.
DVMResident
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Re: Best way to 'deselect' a stock from an index?

Post by DVMResident »

Holding mid-cap for your US holdings is a simple way to avoid Tesla and higher concentration in general.

For example, Vanguard’s mid cap (VIMAX)’s top 10 makes up 6.7% vs total market VTSAX’s top 10 make up 23.90%.

Search for Mel’s unloved mid cap threads for a deep dive on this approach.
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nisiprius
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Re: Best way to 'deselect' a stock from an index?

Post by nisiprius »

Don't bother. The stock market is big. Individual stocks, even Tesla, are small. Do some simulations of the S&P 500 with and without Tesla. You'll hardly be able to see the difference. Even if Tesla went to zero instantly, you'd barely be able to see the difference. The stock market can lose 2% in a single day easily, does so pretty often, too lazy to get the exact numbers right now. Might be once a year on the average.

Betting against an individual stock is just as big a gamble as betting on one. People often think "even if you can't pick the best ones, surely you can avoid the obvious dogs." The track record of long-short funds shows that no, it's not any easier. A category of funds called "130/30 funds" which put 30% of their funds into shorting bad stocks, was extraordinarily popular in 2006 and 2007, were included in many 401(k) funds, were confidently projected to supersede long-only funds--and failed so completely and so disastrously the few even remember them.

And Tesla isn't even an "obvious dog."
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mpsz
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Re: Best way to 'deselect' a stock from an index?

Post by mpsz »

PolarBearMarket wrote: Wed Oct 27, 2021 7:21 am I personally don't like holding so much of something where the value seems to be driven as much by memes and tweets as by fundamentals. Yes, everything in the stock market is driven by speculation, but this feels like an extreme case given its outsized position in my portfolio.
You're right... it's a terrible idea to invest in a popular company, where people aspire to own their products.

Sit back and enjoy the ride. TSLA has already been great for your portfolio in the last year.
dukeblue219
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Re: Best way to 'deselect' a stock from an index?

Post by dukeblue219 »

I'd short it to balance it out, but then again, I wouldn't do it in the first place.

Creating your own S&P499 is far more work.
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steve r
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Re: Best way to 'deselect' a stock from an index?

Post by steve r »

Is this Tesla only or MSFT, AAPL, and other megacaps? If so,

One idea I have tossed around but never done is a combination of equal weight 500 index (others exist) and 500 index (perhaps a 50/50 split), and then the extended market index at market cap weighting.

I do not like having so much weight in just a few stocks. I dislike the complexity of the above strategy even more. Seems very prone to behavioral issues.

Another idea is more international stocks. Plenty of other threads on this. I am at 35 percent of equity and plan and may move up only modestly if I switch to a different target date index fund.
Last edited by steve r on Wed Oct 27, 2021 1:14 pm, edited 1 time in total.
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afan
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Re: Best way to 'deselect' a stock from an index?

Post by afan »

I agree that "don't worry about it" is the best answer. One of the joys of owning a cap weighted index fund in an efficient market is that you can ignore individual stocks altogether. I don't know how much Tesla, or any other stock, I own in index funds and I don't care.

If you had some reason to care, say you work for Tesla, or somehow came into enough shares that you were overweighted, then in addition to the suggestions above, you could buy deep out of the money put warrants. It would cost you something to maintain the position. Unlike shorting, the most you could lose would be the price you paid for the options if they expired worthless.

If your financial situation does not leave you overweight in Tesla, then ignore it.
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steve r
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Re: Best way to 'deselect' a stock from an index?

Post by steve r »

JoMoney wrote: Wed Oct 27, 2021 8:26 am - More bonds so stocks in general (that all have various issues and risks) make up less of ones portfolio
- More international up to global cap weights so any individual stock makes up an even more trivial fraction of the equity portfolio
- Large Value and/or Dividend tilt
- Use a passive individual stock portfolio, and deal with additional hassle of managing a portfolio of individual stocks, tracking error, and possibly some behavioral issues when you get lots of pieces to play/trade/"rebalance" with and start have other feelings or opinions about individual companies :annoyed
Great point on such strategies (to me) will lead to enormous second guessing and behavior errors.

LCV tilt will work with Tesla and today in general, but not when XOM (Exxon) when it was the largest corporation (and value).
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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burritoLover
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Re: Best way to 'deselect' a stock from an index?

Post by burritoLover »

If Tesla took a major haircut in today's market environment, you can guarantee that would send a cascade of other tech or tech-related stocks tumbling including the rest of the 6 largest companies in the S&P 500 (which make up 25% of the index) - Apple, Micorsoft, Google, Amazon, and Facebook.
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steve r
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Re: Best way to 'deselect' a stock from an index?

Post by steve r »

Delete Duplicate (meant to edit)
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
inbox788
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Re: Best way to 'deselect' a stock from an index?

Post by inbox788 »

2%, don't worry about it.
MrJedi
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Re: Best way to 'deselect' a stock from an index?

Post by MrJedi »

I wouldn't do anything, but another thing you can do is buy a put option.
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Taylor Larimore
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Re: Best way to 'deselect' a stock from an index?

Post by Taylor Larimore »

PolarBearMarket:

Read this short article (a favorite of mine) written 20 years ago by one of the most knowledgeable authors in the business (Jason Zweig):

I Don't know, I Don't Care.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:" In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom."
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PolarBearMarket
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Re: Best way to 'deselect' a stock from an index?

Post by PolarBearMarket »

Thanks all. I appreciate the interesting insight, ideas, and links to articles. I will not do anything. :happy
godhammer
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Re: Best way to 'deselect' a stock from an index?

Post by godhammer »

Check out M1 Finance, you can kinda simulate your own ETF but they only let you pick 100 stocks.
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Brianmcg321
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Re: Best way to 'deselect' a stock from an index?

Post by Brianmcg321 »

LOL.

This can't be serious. How ridiculous. :oops:
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arcticpineapplecorp.
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Re: Best way to 'deselect' a stock from an index?

Post by arcticpineapplecorp. »

Gundy wrote: Wed Oct 27, 2021 8:47 am Just build your own "index". Buy individual stocks. That's what I do (since 1994).

It's not hard to beat the S&P if you have the discipline to hold for decades and the ability to think independently.

Contrary to what you read around here, it ain't gambling.
actually, stock picking is gambling because you're searching for a needle when you could own the haystack.

perhaps you're not aware of Henrik Bessembinder's study that found:
“The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

source: https://wpcarey.asu.edu/department-fina ... sury-bills
And if beating the S&P is "not hard" then why do so many million dollar with crack team researchers and bloomberg terminals fail to do so every single year?? Saying it's easy to beat the S&P is one thing. Showing the evidence is another. You haven't shown any evidence of how easy it has been for you to beat the S&P (if you actually have). Here's the evidence it's not so easy:

Image

source: https://oncoursefp.com//images/Vectors% ... 0final.pdf
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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