Mad Money Recap
Cramer's 'Mad Money' Recap: How to Build Long-Term Wealth
Scott Rutt
07/03/08 - 06:59 PM EDT
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"Stocks are just one part of making yourself extraordinarily wealthy," Jim Cramer told viewers of his "Mad Money" TV show Thursday. Although stocks are the most important element in a balanced portfolio, he cautioned viewers that "there are a lot of other things you have to do if you want those investments to pay off." Cramer identified three necessities that he said all investors need to have taken care of before they invest in the stock market. He said that while these may be boring, they are part of the gospel he preaches in his book Stay Mad For Life. The first necessity Cramer said all investors need to address is credit card debt. "You have to pay off all your credit card debt," he told viewers. Given the extraordinarily high interest rates on credit cards, Cramer said even a great investor can have his gain canceled out by credit card debt. The second necessity all investors need to address is health insurance. He told viewers not to invest a penny in the markets until they have health insurance. "Medical emergencies are the biggest cause of bankruptcy," he said. Along those same lines, Cramer said disability insurance is the third item all investors should address before they invest. Cramer stressed how easily investors can get "wiped out" by unexpected hospital bills. "All the precious gains you've racked up in the stock market will be for nothing, because you'll either have to use that money to pay for health care bills or to support yourself while unemployed and injured because you didn't have health or disability insurance," he said. Cramer took a question from a caller who asked him what it mean to do homework on a stock. Using Caterpillar(CAT - Cramer's Take - Stockpickr) as an example, Cramer said home gamers need to put in time, reading a company's earnings reports, news stories and annual reports in order to make an intelligent decision on a stock.
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The Value of Diversification
After taking care of the "necessities," Cramer told viewers they need to prepare for retirement. He said it isn't enough to just mindlessly save money into a 401k plan. Preparing for retirement should include more than just a payroll deduction. Cramer told they need to stay diversified and play an active role in the management of their savings plans.
Investing for Retirement
Cramer reminded viewers that they should be investing in their retirement and not just saving for it. Cramer noted it's not uncommon for investors to be risk adverse when it comes to their retirement savings. Given how important retirement savings are, and the inherent race against time, he said it's only natural for investors to shy away from risk. But, he cautioned, "it's not enough to just get a 4% return from bonds." Another common 401K investment mistake is to put money in a stable-value type of mutual fund. These funds, he said, not only do not generate wealth but barely keep up with inflation. He recommended S&P 500 index funds as a better proxy for the market's high-quality names. These stocks, he noted, are the best performing asset class over any 20-year period.Adjusting to Market Conditions
Cramer said his favorite piece of 401k investment advice also goes contrary to conventional wisdom. He told investors that investing in their 401k plans evenly throughout the year doesn't allow them to take advantage of big market moves. Instead, he suggested making 401K contributions as the market dictates. "Declines in the market are opportunities to buy," said Cramer. He suggested contributing twice as much any time the market drops 10% or more. Buying more shares of an index fund when those shares are cheaper just makes sense, he added. "This will make a huge difference over forty or fifty years," he noted. "Pay attention to the market," said Cramer, "contribute twice your normal contribution any month the market is down."Maxing Out the IRA
Cramer's final piece of retirement advice was that there is more to investing than just 401k plans, which often come with fees, costs and restrictions. He said individual IRAs are the perfect way to supplement a 401k, giving investors a superior vehicle for managing retirement investments. "After you get the full match in your 401k, you want to put the rest of the money into an IRA," he said. Although individuals can only contribute $5,000 to an IRA in 2008, Cramer still recommended maxing out the account to help fund a terrific retirement.
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