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In a market that has dramatic swings from one day to the next, Jim Cramer is teaching investors a new way to diversify their portfolios that will win in any market.
After all, the old-school method of picking stocks in each sector will no longer protect a portfolio.
Instead, Cramer has created five buckets of stocks that will shield a portfolio while obtaining maximum gain. To begin, every retail investor should have no more than 10 to 15 stocks, consisting of high-yielding stocks, growth stocks, speculative stocks, a healthy geographical stock and gold.
Yes, that's right. Good old gold.
Gold brings a special element into a portfolio, one that makes it different from all other metals. However, Cramer warned that this metal should not make up even 20 percent of an investor's portfolio. That is way too much.
"I think that 10 percent is the upper limit because I consider gold as an insurance policy, and no worthwhile insurance policy should be 20 percent of the money you have invested," the "Mad Money " host said.
Read more from Mad Money with Jim Cramer
Cramer recommends gold because it tends to go up when everything else goes down. It gives investors insurance against geopolitical events, uncertainty and inflation.
Granted, this may sound like a terrible idea, since gold has not done anything spectacular in a few years. However, just as you wouldn't own a home or car without insurance, you shouldn't have a portfolio without gold, Cramer said.
Do you get upset when your insurance doesn't go up in value? No. So, don't ridicule gold.
Owning gold is not about upside potential. It is about minimizing risk to the downside. (Tweet This)
The easiest way to add gold to a portfolio is through an ETF called SPDR Gold Shares, commonly known by its symbol GLD. This ETF owns the metal, and Cramer thinks it does a great job of tracking its price.
"You could also potentially call your broker and buy bullion, the actual physical bars of gold, as opposed to the bouillon cubes I like in my soup, but that only makes sense for investors who have lots of money and can afford to buy gold in bulk and pay to store it in a depository bank," Cramer said.
As for a gold miner stock, remember what makes gold so valuable: its scarcity and the difficulty of getting it out of the ground cheaply.
Cramer noted that almost every single time he has gotten behind a gold stock, he has gotten burned. They just have too many issues, and the stocks get hammered.
So, he finally gave up on the whole group and now sticks with either GLD or the physical commodity.
Ultimately, it's not a matter of wanting exposure to gold — you need it. It will act as an insurance policy for a portfolio. Everyone should have a little, even if it means going the easy route with GLD.