Dealing With the ‘New Bad’
Web Editor, "Mad Money"
“We can’t control the amount of pain the market throws our way,” Cramer said Monday, but “we can absolutely control, however, how we deal with it.”
And the market’s been throwing a lot of pain our way: European debt, that 1,000-point drop in the Dow and the bears who jump on every potentially negative detail to scare you. And don’t forget about financial regulation here in the States and that asset bubble in China that everyone seems so worried about.
So how do you deal with this “new bad,” as Cramer called it? That’s his focus all week on Mad Money. It’s his weeklong stock-market survival school, and tonight he started with the basics. If you sincerely want to protect your portfolio, you must, in the very least, follow these six rules:
1. Never buy stocks on margin, which means borrowing money from your broker to do so. It’s “just plain dangerous,” Cramer said.
2. Use limit orders, not market orders. Limit orders allow you to name your price for a specific transaction, market orders do not. Remember all those Procter & Gamble shares that sold for $38 a piece on the afternoon of May 6, when the Dow took that plunge, even though the stock was worth much more? Yeah, those were a lot of market orders. Don’t do that.
3. Know what you own. If your portfolio is fully researched, you can buy even when the market is falling because you know your thesis is intact. And the opposite is also true: When that thesis is broken, you know enough to sell. Of course, this research takes time, which is why Cramer recommends owning just 10 diversified stocks at a time. Anything more is often too much for the average homegamer.
4. Don’t own too many low-dollar stocks. Speculation is great, Cramer said, but these single-digit names shouldn’t comprise an entire portfolio. Just one will do.
5. This shouldn’t even require mentioning, but – stay diversified. The biggest risk out there is sector risk, so never have more than 20% of your portfolio in more than one group of stocks at a time. Need proof? Think dot-com bust of 2000.
6. Own dividend stocks. These aren’t boring investments for retirees, Cramer said. Go as far back as 1926, and 40% of the S&P 500’s return over that time has come from reinvested dividends. You can’t afford to take a pass on those gains, especially in these volatile times. Instead use the market’s wild swings to buy stocks like DuPont, whose share price got knocked down so much its dividend yield shot up. These “accidental high-yielders” worked better than any other kind of stock during the crisis.
“And I think they will still work,” Cramer said, “whenever the market gives you these dividend bargains.”
Cramer’s charitable trust owns Procter & Gamble.
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