Mad Money

How to Spend Your Mad Money

Cramer’s a firm believer in retirement investing. He recommends taking advantage of 401(k)s, IRAs and any number of diversified strategies to help you build a nest egg. But what about that extra savings you’ve been socking away? Where should that go?

Know Thy Stock

Don’t let it sit idle in a low interest-bearing bank account, that’s for sure. After all, this is your mad money. It’s cash you have to play with now that your other financial responsibilities are in line. Better to put it to work, taking a bit more risk than you would with that nest egg.

To aid in this pursuit, Cramer crafted an investing strategy specifically for your discretionary funds. The basics? Diversify among at least five stocks but no more than 10. The limit’s 20% per name in your portfolio, and make sure none of them overlap, meaning buy different sectors. Remember that you must be willing to do at least one hour of homework for each stock per week. Cramer’s a proponent of “buy and homework,” not “buy and hold.” So you want to keep current with what you own.

Beyond that, a 10-stock basket should hold the following 10 kinds of stocks:

1. A company close to home on which you can do your own reporting. Find a business that employs people you know so you can get the inside scoop on internal goings-on. And read the local paper. That, too, will give you perspective on the company that the Wall Street guys, who rarely check that news, don’t get.

2. A defensive, recession-proof, secular company. You want something like Procter & Gamble , Coca-Cola or Kellogg that delivers consistent earnings regardless of the economy.

3. To balance out the defense, find a high-quality cyclical stock. Cramer recommends buying them when they’ve been hammered low enough to offer decent dividend yields. Industrials and other cyclical businesses rarely pay big dividends because they know shifts in the economy can make meeting that obligation difficult. But sometimes a downturn gives you another reason to find these stocks attractive.

4. Speaking of dividends, a brand-name stock with a big, and safe, yield works, too. In fact, Cramer said every portfolio should have at least one, probably more. The strength of the market will dictate what constitutes a “big” yield, but right now 4% or higher seems right. Think Verizon Communications or AT&T.

5. Own a bank. Something local is a good place to start, but most important is a strong balance sheet free of toxic assets. The ability to acquire competitors is desirable as well.

6. Speculate! Remember, Cramer’s a fan of taking some calculated risks. It keeps the stodgy side of investing fun. So find a small-cap stock you like and go for it. There will be times when the market’s at its worst and speculation-worthy names are hard to find. But otherwise, this is a great way to stay excited about stocks.

7. Pick a retailer, though make sure the store you pick suits the market. Wal-Mart is great during a downturn. When the economy’s booming, go for Coach or Tiffany.

8, 9 and 10. You can own a tech stock as long as your research shows that sector, or your specific stock, works at the time. Energy stocks are right as long as the price of oil and natural gas is, too. And a gold stock is a good hedge against volatility and inflation.

Join Cramer live in the studio for Mad Money: The State of Cramerica, a special town hall-style show on Wednesday, Jan. 21. Get your free tickets here!

Jim's charitable trust owns Procter & Gamble.

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