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How many stocks should you own at one time?

Friday, 21 Feb 2014 | 6:00 PM ET
Spec stocks: Right for everyone?
Monday, 5 Aug 2013 | 6:15 PM ET
Speculative stocks can produce enormous gains, explains Mad Money host Jim Cramer. But that's not the only reason he thinks you should own one.

(Click for video linked to a searchable transcript of this Mad Money segment)

There are probably a hundred stocks or more that you'd like to own, right now. But that would be too many, wouldn't it?

Jim Cramer sure thinks so.

"Unless you're a professional money manager, you should own no more than ten and no fewer than five stocks in your portfolio," said the "Mad Money" host.

Although that may seem like an odd rule, there are very sound reasons for it.

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No More than 10

"Any more than ten and you'll have to spend too much time doing homework," said the Mad Money host.

Jim Cramer thinks homework is the lifeblood of successful investing and it involves far more than reading the latest earnings report released 4 times a year.

An active investor must always be aware of developments that 1) impact the company as well as developments that 2) impact the entire sector. That can range from a spike in input costs such as sudden rise in the price of oil or corn to a shift in sentiment that could generate new legislation that either aides or harms a company.

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"You've got to spend at least a couple of hours a week on this kind of research," said Cramer. Successful investing involves taking responsibility for the stock which you chose.

If you hold a full time job, and hold more than 10 stocks Cramer just doesn't think you'll have enough time to do all you need to do to be successful.

No Less Than 5

Diversification is an important part of Jim Cramer's strategy for success; it's the equivalent of not putting all your proverbial eggs in one basket.

Quite simply, if you're holding less than 5 stocks, Cramer believes your risk isn't spread out – enough.

"You will be overexposed to one industry and an unexpected negative can do some real damage," Cramer said.

Diversification mandates that investments be spread across multiple sectors.

For example, if you're exposed to retail, technology, consumer staples andutilities, a negative development affecting the entire energy sector won't have as much of an impact as it otherwise would have if 50% of your portfolio were in energy.

"Diversification is the single most important concept in investing," he said. "It's the key to avoiding enormous losses and making sure you can weather a storm."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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