- "Mad Money" host Jim Cramer goes over a crucial investing concept known as suitability.
- Cramer tracks the right investments for every age, including newborns, kids and teens.
- The "Mad Money" host's bottom line is that investing should be based on individual preference.
Suitability may be all-important in investing, but the concept can be lost on children, who probably have little to no interest in what stocks are or how to invest, says CNBC's Jim Cramer.
"Let's be honest. You couldn't explain to a kid what a stock is to save his or her life," the "Mad Money" host told viewers.
Cramer grew up differently. His dad taught him about stocks, giving Cramer the business section of the Philadelphia Bulletin each day so he could look at stocks' closing prices.
"I liked the stock picking process so much I got the whole fifth grade class at Penn Manor involved. We would all pick stocks and keep track of the closing prices for a week to see who could make the most money," the "Mad Money" host said.
But there are ways to learn about stocks even for kids who play with toys, Cramer said. While they may not know what it means to own shares of companies, they know they love their Hasbro Star Wars Lightsabers or their Mattel Barbie dolls.
"I bet you they'd pick Hasbro over Mattel," Cramer added.
"If you want to get your kids into investing, buy a brand name," Cramer said. "Something they can see and hear and tough and even like. Yeah, just own it. The stock won't always work. But think of what you liked when you were little, and remember that you may have a long term winner on your hands."
There used to be an understanding in the stock market that stocks could be here today and gone tomorrow, but Cramer finds that is not the case anymore.
"We've gone well beyond that," the "Mad Money" host said. "Those days are long over, and if you recommend a stock for a trade, even if you say, 'Buy it today for the analyst meeting and sell it tomorrow,' there will always be a YouTube video kicking around that shows you liked the stock but never gave it the 'sell' call."
That is why Cramer wanted to explain the concept of suitability — an idea that suggests certain stocks are right for some investors, but wrong for others.
Cramer thought it was obvious that stocks came with no guarantees until a Goldman Sachs executive explained the worth of knowing what an individual investor wants to Cramer, then an incoming summer intern at the bank.
That opened the "Mad Money" host's eyes to the importance of risk tolerance. Clothes, cars, devices and houses either come with some level of insurance or can be returned. Stocks cannot.
So Cramer decided to go through the investments suitable for investors of all ages, starting with the youngest of the young.
Investing for children can be tricky, but Cramer says that if you do it right, it can leave your loved ones much better off by the time they grow up than if you avoid it altogether.
"Parents, grandparents, listen up. You can give all sorts of things to families that had just had babies. I want you to open up accounts for them. Or at least give them some shares of stock so that from the earliest moment you can start the process of saving that you have to do," Cramer said.
His first suggestion was taking several hundred dollars and buying shares in an index fund like the S&P 500, then pairing that with some kind of total return fund, which provides a wider array of stocks.
And for investors who are more interested in buying individual stocks for newborns, Cramer suggests picking two — a stock with a dividend that could be increased each year and then reinvested, and a stock with some more growth.
Over the years, Cramer found that when it comes to investing, some of the best advisors have been none other than his two teenage daughters.
"We all know that teenagers are incorrigible. The last thing they want to hear about is stocks. They have bigger fish to fry. To which I say, so what? I'm not going to tell them what to buy. I'm going to let them tell me," he said.
Cramer started with the stock of Domino's. The "Mad Money" host thought it was a good speculative stock after CEO Patrick Doyle took up reforming the quality of the ingredients.
"But that's not what made this stock a 'Mad Money' crown jewel. Nope, it was the technology behind DPZ," Cramer said, adding that until his kids discovered the Domino's ordering app, they preferred local pizza restaurants to the national chain.
Cramer's daughters, like so many other millennials, hate talking on the phone, especially given the risk of the person on the other end getting their orders wrong or giving them an incorrect estimate for when their food would be delivered.
"All of this technology was totally lost on me," Cramer said. "I never minded the phone, was always patient about when the pizza would arrive, never cared about the interchange with the delivery person. I kind of liked it. In short, I was not like the target audience. That's why I always call Domino's a tech company that sells pizza."
Once you are in the real world, it is critical to start saving, whether it is through an employer-provided 401(k) plan or a self-run Individual Retirement Account, Cramer said, adding that he prefers the latter because it lets you individually pick stocks.
At this point, investors should start putting together the mix between index funds and individual stocks in their portfolios.
"There's too much risk in individual stocks to just put together a portfolio of them of your own choosing," Cramer said. "So, at a minimum, I am demanding that you put your first $10,000 beyond what you have from your first twenty years into an index fund, the S&P 500 being my favorite."
After that initial $10,000, Cramer encourages investors to pick stocks while staying diversified and doing their homework after they buy, but those rules change as they reach their 30s, 40s, 50s and beyond.
Disclosure: Cramer's charitable trust owns shares of Disney and Johnson & Johnson.