Cramer's No. 1 rule for protecting your portfolio

Investment professionals can create machines with fancy algorithms for trading and snazzy software for picking stocks to protect portfolios, but Jim Cramer knows investing all boils down to one word: diversification.

"I am offering a new kind of diversification that can help you, guide you toward what kinds of stocks I want you to have if you are going to manage your money yourself," the "Mad Money" host said.

So for the retail investors out there, Cramer is sharing his top tips on how to manage your own portfolio.

Cramer recommended a personal portfolio with a minimum of 10 stocks and maximum of 15. That range allows investors to keep track of each stock and still do their homework.

Number one, Dollar bill, portfolio concept
Ben Peterson

When Cramer refers to homework, he means knowing what the company does, what you are looking for, how it is doing and why it is doing it. Yes, this takes time, but it is extremely important.

The "Mad Money" host does not believe in strict diversification by sector anymore. After all, the world has changed and throwing a couple of tech stocks or industrials into a portfolio isn't going to cut it.

Additionally, electronic-traded funds are linking sectors together in ways that did not exist previously. Thus, investors need a portfolio that will shield them, providing the maximum protection and upside potential.

In order to protect your portfolio, Cramer recommended covering the following five specific areas:

1. Gold
2. A dividend-paying stock with a high yield
3. Growth stocks
4. Speculative stocks
5. Stocks from a healthy geography

"Cover all five bases, and you'll have a portfolio that can win in any market," Cramer said.

Now, before you run out and buy stocks in all of Cramer's categories, there are a few essential tools needed to manage your own money. First, recognize the value of humility. Besides greed, nothing can cost an investor more than arrogance.

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