One nightmare scenario is what professionals refer to as being "too long." This means the price of a stock is falling, and investors can't buy any more stock because they are out of money. Then they decide to make the terrible decision to borrow money to finance your portfolio, a move that Cramer thinks is a terrible idea.
"Stocks aren't houses. You can't fall back and live in them if you have mortgages on them. They just get taken away," Cramer said.
So, what is the magic trick to bail you out of a bad situation?
"Discipline trumps conviction," Cramer added.
He recommended that investors find their own form of discipline to watch their stocks and have a game plan for when things go wrong. For instance, Cramer has a system of ranking his stocks when things are good, so this way he can hedge himself when they go awry.
He also thinks it is important to "circle the wagons" on a few high-quality stocks, and be willing to buy them when they fall so you can get a better average price for your earnings.
Cramer's ranking system will get you through the chaotic times and allow you to remain cool and methodical when everyone is scrambling in chaos.
At the end of the day, Cramer wants investors to recognize that things will go wrong. There will be a stock that you own one day where there is something wrong with the company, and you don't know about it. Events will come that you cannot foresee.
The trick to reducing the damage to your portfolio is to be ready with a game plan that will bail you out in the short term and keep you in the market long term. This way, your money is ready to work for you when you need it most.
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