Mad Money

Cramer's rules: Preparing for a market nosedive


In more than 30 years of investing, Jim Cramer has created a vast rule book surrounding the market. His goal is for investors is to learn these rules and apply them without even thinking about it, starting with discussing the importance of strategic cash placement in a portfolio.

Much to his surprise, Cramer has found that a lot of people aren't prepared when a correction occurs in the market. They are charmed into the market when things are good and then unprepared when things get bad. They assume that a correction means that something is wrong and that stocks shouldn't be touched.

"That is a very big mistake. Corrections happen all of the time after big runs, and they are to be anticipated, but you can't write off the market when they happen," the "Mad Money" host added.

Another mistake that Cramer sees commonly is that many believe they are supposed to be fully invested at all times. He has even met money managers who think they are supposed to have all money invested.

This is complete nonsense!

Having a pile of cash in your back pocket could mean the difference between good and bad stocks in your portfolio
Kai Zhang | Getty Images

Having cash on hand when the market corrects is the key to protecting your portfolio. Because sometimes the market will stink and there is nothing to do but just sit in cash.

"In fact one of the chief reasons that I outperformed pretty much every manager in the business during my 14-year run as a professional money manager is that there were substantial blocks of time when I was largely in cash," Cramer said.

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Cash is the perfect hedge in an environment when the market hits dangerous highs and could protect from devastating losses.

Cramer considers cash to be the most underrated investment of all. Whenever he sees the market spike, he starts to sell a little and trim here and there to build up a supply of cash. He sells on strength and buys on weakness.

Otherwise, Cramer fears that investors could wind up selling their best stocks just to hang on to their worst stocks because the higher-quality stocks stopped going up — a big mistake.

However, investors must be aware that there are many circumstances that will cause the stock market to plummet. Get ready for a correction, because it will happen again, even after the nasty decline on Friday.

Having a pile of cash in your back pocket could mean the difference between good and bad stocks in your portfolio. (Tweet This) And keeping a solid portfolio that will ensure that it will be able to bounce back from a correction. That means having cash to subsidize, instead of selling high-quality stocks, so you can outperform the best money managers out there, too.

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