Mad Money

Cramer's 'Playing Defense' Rules: Part 1

Forget about making money. Sometimes holding on to what you have is much more important.

That was the focus for Monday’s show. Cramer offered up 25 rules that will keep you from losing your hard-earned cash when the market’s at its worst.

Remember: Plan for the downside, and let the upside will take care of itself. The best way to do that is by following these important tips.

1. Diversify. Cramer’s not afraid to be a nag about this one. If you spread out your risk, you’re less likely to lose large amounts the money. So never keep more than 20% of your portfolio in a stock or a sector. This isn’t rocket science. Just think back to all those people overinvested in tech stocks in 2000.

2. Buy and sell slowly on wide scales. You don’t ever want to get in or out of an entire position all at once. Looking to buy a few shares of your new favorite stock? Then do so in increments as it increases in price. That way you don’t buy it all at the top. The same goes for selling. Take at least some profits when you’ve made some gains. Then scale out of it as the price comes down. This is especially true, Cramer said, for names like Apple or Research in Motion that fluctuate wildly. There’s rarely a time when you won’t get the chance to buy lower or sell higher.

3. Your first loss is your best loss. When the thesis that drew you to a stock isn’t working anymore, get out. Even if you’ve taken some losses. Cramer sold Fannie Mae when it was in the $60s, after a decline, but never regretted it. Especially not when he watched the stock plummet into the single digits. Never feel bad about taking losses if the thesis has changed.

4. Dividends limit losses as long as they are relatively safe. Measure a dividend yield against Treasurys. If a company’s payout is better than Washington’s, you’ve got a winner. And look for companies that have the potential to increase their dividends than cut them. AT&T, Verizon and ConEd have plenty of cash on hand to keep those payouts coming. During this recent credit crisis, banks like Wachovia and Washington Mutual did not.

Click here for Cramer's 'Playing Defense' Rules: Part 2

Click here for Cramer's 'Playing Defense' Rules: Part 3

Click here for Cramer's 'Playing Defense' Rules: Part 4

Click here for Cramer's 'Playing Defense' Rules: Part 5

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