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Should I buy Tesla shares or the Scottish Mortgage Investment Trust?

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Tesla (NASDAQ: TSLA) shares are one of the market’s hot investments. The company has made some of its investors incredibly rich over the past few years as it helped revolutionised the global electric vehicle market. Some analysts believe its growth is only just getting started.

With that in mind, I’ve been considering the stock from my portfolio after recent declines. However, there’s always going to be the risk the business doesn’t live up to lofty Wall Street expectations.

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As such, I’ve also been reviewing the Scottish Mortgage Investment Trust (LSE: SMT) to see if it could be a substitute for the American vehicle maker in my portfolio.

Tesla shares on offer? 

Over the past few weeks, shares in Tesla have dropped from their all-time high. Some investors believe this could be a buying opportunity, based on the company’s long-term potential. 

The problem with this opinion is the fact it’s impossible to predict the future. Tesla has revolutionised the electric vehicle market over the past decade, and its shareholders have reaped substantial rewards as a result. Nevertheless, past performance should never be used to guarantee future potential. There’s no guarantee Tesla’s sales and earnings will continue to grow. The risks to the company’s success are increasing. 

While the business has the first-mover advantage, and its vehicles are seen as the holy grail of electric car development in some quarters, its competitors are catching up. The next 12 months are set to be the busiest ever for electric vehicle launches. While Tesla is planning to launch a selection of new models, it will face stiff competition from the likes of Volvo, VW, Fiat and Mercedes

This growing competition suggests that while Tesla may be able to maintain its growth rate in 2021, it’s by no means guaranteed. 

That’s why I’ve been considering the Scottish Mortgage Investment Trust. 

Scottish Mortgage Investment’s key advantage 

Until January this year, when the company sold some of its Tesla shares, Scottish Mortgage was the electric vehicle firm’s second-largest shareholder, after the founder Elon Musk. The holding is still the largest in the £17bn trust’s portfolio. 

However, alongside Tesla, the fund also owns a portfolio of public and private tech companies. I believe this provides some much-needed diversification. For example, one of the trust’s top 10 holdings is NIO Inc, a Tesla competitor.

With competition in the electric vehicle sector growing, I don’t think it makes sense the back just one horse. Scottish Mortgage Investment’s diversified approach seems to provide the best of both worlds. The trust will benefit significantly if Tesla continues to outperform. If the group starts to struggle, the impact on the organisation will be limited. 

Unfortunately, this focus on technology could also be a drawback. If tech stocks start to struggle, the trust may do so as well. In the second half of February, the trust lost more than 20% of its value for this reason. That’s something investors need to consider. I would only own Scottish Mortgage as part of a diversified portfolio for that reason.  

Therefore, I’d buy Scottish Mortgage today and avoid investing in Tesla shares directly. Another advantage of investing in the UK-listed trust is it’s easier for UK investors to buy and sell. There’s no need to worry about foreign exchange fees or other challenges by investing directly in an overseas market. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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