The truth about money in the U.S. is that unless you are born with a silver spoon in your mouth, there aren't many ways to become really wealthy. That is why Jim Cramer is so passionate about helping investors plan for a viable financial strategy.
"Thanks to the magic of compounding, the earlier in your life you start investing in the market, the bigger your long-term gains can be," the "Mad Money" host said.
Cramer is confident that even if an investor doesn't have a high-paying job, as long as they save a decent chunk of their paycheck and invest it wisely each year, they can grow their wealth and become at least financially independent.
When Cramer researched the going all the way back to 1928, before the Great Depression, the average annual return through the end of 2014 was about 10 percent, including dividends.
"Show me an asset class with a better average return. You can't do it! Stocks aren't just the best game in town, they are really the only game in town if your goal is to grow your wealth," Cramer said.
When it comes to investing, Cramer always says there needs to be two discrete places for cash.
The first is a retirement portfolio, which is more conservative and should be invested through a tax favored vehicle like a 401(k) or an IRA.
The second is a discretionary or mad money portfolio. This is the place to take more risks with money once a retirement fund has been invested. The first $10,000 invested in the market should go to a low-cost index fund or ETF that mirrors the S&P 500. This way you can get exposure to the stock market gains without putting the time or effort needed to pick individual stocks.
One of Cramer's top rules for younger investors are that they should take more risk. That doesn't mean they should go crazy and speculate with all of their savings. But it does mean that Cramer recommends using some discretionary money to bet on high-risk long shots. That refers to smaller, less well-known companies with massive upside potential.
While Cramer loves the public school system, the truth is that it cannot be relied upon to teach children about money.
"If you want your children to become fluent in the language of finance, you are going to have to do it yourself," Cramer said.
That means not waiting until after kids go to college to teach them about financial literacy. Once kids go to college, they will be bombarded by credit card offers which could be irresistible. Credit card debt on top of student loans could send someone into debt for decades.
Cramer started with the recommendation that parents give their children the gift of stock in a high-quality company that resonates with younger people. One option is Disney, which has blockbuster movie franchises like "Frozen" and "Star Wars" under its belt.
Ever since the Great Recession, interest rates have been so low that Cramer hasn't been recommending investors to buy bonds. That isn't because "Mad Money" is just about stocks; it is because stocks and bonds play very different roles in a portfolio.
"In general, for the last few years, even when the stock market has been getting absolutely pounded, bonds simply haven't represented very good values versus equities," Cramer said.
But that doesn't mean there isn't a place for bonds in a portfolio. They play an essential role in investing, especially as investors get older.
How much of a retirement portfolio should be kept in bonds versus stocks? Cramer broke it down by age:
- 20s: None
- 30s: 10 percent of your retirement fund; 20 percent if you are conservative
- 40s: 20 to 30 percent
- 50s: 30 to 40 percent
- 60s: 40 to 50 percent bonds
- Post-retirement: Increase bond exposure to 60 to 70 percent
Additionally, Cramer doesn't subscribe to the "buy and hold" mantra that most do. He's all about "buy and homework." That means that no matter how confident one is in a company, they must keep checking up on it regularly to make sure nothing has gone wrong in the story.
When taking these investments into consideration for the long term, one thing became very apparent to Cramer: if you know what you're doing, a bear market is an opportunity.
A bear market refers to when the averages are down by more than 10 percent from their highs and seem like they could go lower.
"What I am saying is that when you are faced with a bear market … it probably makes more sense to start buying most stocks, rather than selling them, as long as you are willing to take some short-term pain," Cramer said.
The key is to be patient enough to take advantage slowly — so you don't buy too close to the top — and to be careful about the stocks chosen in a bear market. Do your homework and pick the stocks of companies that are doing well, or doing OK and could be doing better in a stronger environment.
And to really take advantage of a monster decline, Cramer said to keep cash on the sidelines to make your move. Then you can buy high-quality stocks in small increments on the way down.