Investment professionals can create machines with fancy algorithms for trading and snazzy software for picking stocks to protect portfolios, but Jim Cramer knows from his long career that 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 all of the homegamers out there, Cramer is sharing his top tips on how to manage your own portfolio. Cramer recommended a personal portfolio minimum of 10 stocks and maximum of 15. That range allows investors to keep track of each stock and still do the homework.
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 strict diversification by sector. The world has changed, and throwing a couple of tech stocks or industrials into a portfolio isn’t going to cut it anymore.
Electronic-traded funds are linking sectors together these days in ways that Cramer never imagined possible. Thus, investors need a portfolio that will shield them in all types of markets.
There are five areas of stocks that need to be covered for maximum protection and utmost upside. They are as follows: gold; a dividend paying stock with a high yield; growth stocks; speculative stocks; and something 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, is to recognize the value of humility. Besides greed, nothing can cost an investor more than arrogance.
“Repeat after me, ‘Sometimes I am going to be wrong.’ Come on, say it. ‘Sometimes I am going to be surprised.’ And one more: ‘Sometimes my stock picks won’t work out despite my disciplines.’ ”
Good investors in the world are ready to expect the unexpected, Cramer said. That is why they keep a diversified portfolio.
Ultimately, that means having only 20 percent of holdings in one sector, and following Cramer’s five areas of new diversification. In 2020, your portfolio can ride the wave of prosperity all the way into the new year and be ready for anything.
Trader Georgi Bozhidarov