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TheStreet Open House

Jim Cramer's 'Mad Money' Recap: Protecting Profits

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this program last aired Aug. 5, 2013.

NEW YORK (TheStreet) -- When you own stocks, you have to be humble, Jim Cramer said on "Mad Money" as he dedicated the entire show to preaching against what he called the worst sin of investing, arrogance.

When you're putting together a portfolio, there's one you can be sure of, said Cramer: At some point, something is going to go wrong. And when that happens, you need to be prepared. How do you get prepared? One word, diversification.

Cramer said that diversification is the single, most important concept in investing and the key to avoiding enormous losses. A properly diversified portfolio can handle just about anything, he said, and keeping you in the game is what "Mad Money" has always been about.

Diversification means no sector can account for more than 20% of your portfolio, Cramer explained. So if you own five stocks, that means only one technology name, one health care stock, one industrial and so on. Not sure if two stocks overlap? Err on the side of caution, Cramer said.

But beyond just preventing overlapping sectors, Cramer said that diversification means also owning stocks in five key areas, mainly a high-yielding dividend stock, a growth stock, a speculative stock, a foreign stock and something related to gold.

Why gold? Because gold acts as an insurance policy, a hedge against global chaos. Gold tends to go up when everything else goes down, he said, while at the same time, appreciating over the long term. The SPDR Gold Shares (GLD) exchange-traded fund remains a favorite if you're not able to buy gold bullion or gold coins.

When it comes to gold mining stocks, however, that's a whole other ballgame. Miners don't trade with the price of gold, explained Cramer, but with their own production output. That production can be hampered by everything from geopolitical issues to the weather, making the miners a far riskier investment than just investing in the commodity itself.

Unconventional Wisdom

Cramer's next lesson for investors was that sometimes conventional wisdom is just plain wrong. He said for decades those "in the know" on Wall Street have been telling investors they must only invest the so-called blue-chip companies, those with the size and strength to provide stability for the long term.

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