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Protecting Your Portfolio

Friday, 7 Dec 2007 | 12:03 PM ET

Flawless investors don't exist. Not even Cramer can claim that title. So it's important to own stocks that take this fallibility into account. Think of it as portfolio insurance.

All That Glitters...
Some stocks you want to own for the upside, and other stocks you might own for their hefty dividend yields, with Mad Money host Jim Cramer.

With foreclosures soaring and housing prices plummeting, deflation is more of a concern to Cramer than inflation. But impending rate cuts could cause some decrease in purchasing power. So Cramer recommended buying gold stocks as insurance against that possibility.

The catch here is that gold stocks haven't been performing well lately, and if Cramer's right about the U.S. economy, they won't see much upside for some time, if at all. But upside doesn't matter when it comes to insurance stocks, he said. Their purpose is only to protect a portfolio as much as possible when everything goes wrong. So if these backup plays stay flat in the meantime, that's just fine.

Yumana and Barrick are Cramer's favorites in the gold sector. Barrick's assets continue to grow thanks to acquistions -- Arizona Star and Highland Pacific -- and a 50/50 split with Novagold on Donlin Creek, believed to be one of the biggest undeveloped gold deposits on the continent, in Alaska. And since ABX hasn't locked in prices on the gold it sells, the stock should move higher if the price per ounce increases as a result of inflation.

There's upside in Yumana, Cramer said, even though that's not what he looks for in an insurance stock. But any investor would be happy knowing a new gold vein in Chile and newly discovered high-grade gold ore in Brazil will boost output significantly. And Cramer expects good news when the company releases its updated resource estimates early next year.

Both Yumana and Barrick are great stocks, but remember the point: They're not meant to be big winners, Cramer said. They're insurance stocks. So don't drop them if they don't jump immediately.

Want more great investing tips from Cramer's new book, Stay Mad for Life? Buy it here.

Questions for Cramer? madmoney@cnbc.com

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

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ABX
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