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Rule No. 15: Don't Forget About Bonds

Editor's note: Jim Cramer's new book, Real Money: Sane Investing in an Insane World , is available in selected bookstores now. As a special bonus to RealMoney readers, we will be running Cramer's "Twenty-Five Rules of Investing." For more about the new book and to order it, click here . Today, we present Cramer's fifteenth rule of investing. Read more about his rules:

  1. Pigs Get Slaughtered
  2. It's OK to Pay the Taxes
  3. Don't Buy All at Once
  4. Buy Damaged Stocks
  5. Diversify to Control Risk
  6. Do Your Homework
  7. Don't Panic
  8. Buy Best-of-Breed
  9. Defend Some Stocks
  10. Don't Bet on Bad Stocks
  11. Don't Own Too Many Names
  12. Cash Is for Winners
  13. No Woulda, Shoulda, Couldas
  14. Expect Corrections


"Where are the bonds?" That's how I used to begin every phone conversation when I was on the road, away from my desk, back when I ran my hedge fund.

Yet people forget the bond market all the time. They forgot it in 2000, even though it told them the economy was softening. They forgot it in 2001, when it was clear that the cash rates were too competitive to stocks and would cause a massive selloff.

That's why I say:

Don't forget bonds.

I was trained to focus on bonds because bonds are the competition to stocks, the competition I most fear. When short-term rates go sky-high, you have to expect companies that had been bought for good yields, stocks like Bank of America (BAC) or BP (BP), will sell off.

When long-term rates fall to 4%, you have to believe that the economy may be too soft to own deep cyclicals or that stocks that have high yields, like utilities -- I like to watch Duke Energy (DUK) -- will be on the move.

You need to watch more than the stocks. If this were basketball, I would be saying that if you just watch the man with the ball, let's call him Citigroup (C), and you don't watch what the others are doing on defense -- the bonds -- there's no way you are getting to the basket. The men without the ball -- the bond market -- can determine the action.

Many people who got in this game in the last decade still don't even know what bonds are. They are troubled when you say bonds went up today. They think that means interest rates are going up rather than what it really means, which is that interest rates are going down. If you don't understand how bonds work, I think you will not be able to make nearly as much money as if you do.

By the way, a lot of younger managers think they only need to think about bonds if they own Washington Mutual (WM), American International Group (AIG) or Fannie Mae (FNM).

They don't think bonds matter with a portfolio of Research In Motion (RIMM), eBay (EBAY) or Qualcomm (QCOM).

Wrong! When interest rates move significantly higher, no one's going to pay a lot for the future earnings growth stocks provide.

So keep your eye on the ball, and on the men without it.

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
7. Don't Panic 8. Buy Best-of-Breed
9. Defend Some Stocks 10. Don't Bet on Bad Stocks
11. Own Fewer Names 12. Cash Is for Winners
13. No Regrets 14. Expect Corrections
15. Know Bonds
Check back for more of Cramer's Rules

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@thestreet.com. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. EST weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict."

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