Cramer's Most Important Lesson in Investing
The single most important concept in investing is diversification, Jim Cramer said on CNBC's "Mad Money."
"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 is "basic 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 from "a healthy geography," meaning the underlying company only has exposure to sound economic markets.
"Cover all five bases and you'll have a portfolio that can win in any market," Cramer said.
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