After more than 30 years of investing, CNBC's Jim Cramer knows how difficult it can be to put together a great portfolio and follow his many investing rules at the same time.
Sometimes, those rules can even seem contradictory. You should have conviction in the stocks of companies you believe in, but you should be ready to change your mind if the facts change. You need to be cautious, but you also need to be ready to pounce on key opportunities. You should be skeptical, but sometimes, you have to suspend your disbelief.
"Believe me, I get it," the "Mad Money" host said. "If you take all my rules literally, you’re going to be running around in circles while tearing your hair out. I mean, how do you think I went bald?"
But Cramer wanted to make sense of the madness and put his rules into context for investors.
And for those who want to manage their own money, Cramer has one overarching rule: you need to know yourself.
Knowing your personal objectives is critical to building the perfect portfolio, he said. Whether you're trying to make a life-changing purchase like a home, saving for retirement or just have some cash to spare on investing, those goals all require different mindsets.
"Far too often, people will invest in the stock market with the simple, poorly defined goal of making some money," Cramer said. "The truth is, there’s no one-size-fits-all approach to investing and anybody who tells you differently is either dangerously misinformed or flat-out lying to you."
Cramer knows everyone wants to make money, but those who want to make money in the stock market need to answer a few critical questions:
- How quickly do you want a return?
- What are you willing to risk to get that return?
- How much can you afford to risk in the first place?
These questions are so important because your 401(k), IRA or brokerage accounts "do not exist in a vacuum," the "Mad Money" host said. For example, if you need slow-and-steady gains for your retirement portfolio, a fast-growing stock like Netflix might not be the stock for you.
Cramer offered up an analogy. If you want to fly across the Pacific Ocean, you should take an airplane like a Boeing 747. You can't fly across the Pacific in a Ford Fiesta. But if you're going to pick the kids up from school, a Ford Fiesta might be just right. If you're going to Home Depot, however, a Ford Fiesta might be too small, and there's no way a Boeing 747 would work — in that case, a pickup truck might be your best bet.
Even if that sounds obvious, that's how Cramer likes to look at stocks. Savings-focused investors should look for low-risk, steady-eddie names; investors who don't have time to research their holdings should stick with basic, low-cost index funds; and investors who have more time and money to spare can set up multiple portfolios or take more risks, he said.
"In short, before you can start making judgments about individual stocks, you need to figure out what your own internal yardstick's going to look like," the "Mad Money" host advised. "That’s the foundation of good investing judgment, knowing what you need so you can find stocks that are suitable to your particular needs."