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With turmoil hitting markets overseas lately, Jim Cramer thought he would review the necessity for geographical diversification in a portfolio. And he doesn't mean just picking stocks based on international exposure by sector.
Over the years, Cramer learned that the traditional way of diversifying — picking stocks using industry sectors — is no longer going to work. A new world with new challenges requires a new way of categorizing stocks.
Thus, he recommended a diversified portfolio consisting of high-yielding stocks, growth stocks, speculative stocks, gold and stocks from a healthy geography.
What does a healthy geography mean? Previously, Cramer would have recommended adding foreign exposure to a portfolio. But now that he has seen the damage left behind from Europe, China and the emerging markets, he tweaked that definition.
"What you really need is a stock that is in a safe geography. At times, when the United States is growing more slowly than the rest of the world, you need something international — and not just something that does a lot of business overseas," he said.
Read more from Mad Money with Jim Cramer
Cramer means a company actually headquartered in a foreign country. The "Mad Money " host referred to a safe geography because foreign stocks are not always a good idea.
Sometimes, when it seems like the world is falling apart, the domestic security of the U.S. will shield your portfolio from the dangers of the rest of the world.
Essentially, in times of international turmoil, that slot in your newly diversified portfolio should be filled with something domestic, Cramer said. And in times of domestic turmoil, the slot should be filled with a foreign company.