Cramer's Most Important Lesson In Investing
The single most important concept in investing, Cramer said Friday, is diversification.
"If your portfolio is properly diversified, then you can handle just about any setback," he said. "You can come back from any financial disaster."
There are simple ways investors can achieve diversification, Cramer said. Make sure that no one sector or segment of the economy should account for more than 20 percent of your portfolio. If two stocks trade together or seem to move based on the same factors, your portfolio is not diversified. The goal is to spread your money across unrelated stocks, so when something happens that causes one of them to do down hard, the rest should remain relatively unscathed or even go higher. This the "traditional view" on diversification, Cramer said, and it's mandatory.
Investors should also consider the "new diversification" method, as Cramer coined it. For maximum protection and maximum upside, investors need to be in these five areas: gold, a dividend-paying stock with a high-yield, a growth stock, a speculative play and something foreign.
Gold tends to go up when everything else goes down, Cramer explained. He likened it to an insurance policy against economic or geopolitical chaos, uncertainty and inflation. When other stocks would fall in response to such calamities, gold tends to rise. Owning gold minimizing your risk to the downside, he said. Consider getting into the precious metal through the SPDR Gold Shares exchange-traded fund.
Cramer said investors could also asked their broker about buying bullion, which is the actual physical bars of gold. He added that buying bullion only makes sense for investors, who can afford to buy in bulk and pay for the bricks to be stored in a depository bank.
If interested in gold miners, the "Mad Money" host recommends looking for companies with low costs and production growth. He warned that the miners are often prone to an array of setbacks, including debt, mismanagement and the like, but investors who do their homework can often avoid these issues. Nevertheless, Cramer isn't recommending any gold mining stocks right now.
"To make sure your portfolio works in any kind of market, you need to own some gold as insurance," Cramer said.
When this story was published, Drew Sandholm owned the GLD.
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