Jim Cramer's 'Mad Money' Recap: Cramer Opens His Playbook
But many 401(k)s also severely limit your investment choices, Cramer said, and many of the options include high fees from the few mutual funds they offer as well as fees from the 401(k) plan administrator as well. That's why Cramer only recommends 401(k) plans if they have an employer match. Once the match is met, he prefers individually run IRA accounts where investors are in complete control and can pick individual stocks.
Too Many Choices
Sometimes, too many choices can be a bad thing, Cramer told viewers. That's certainly the case with investing in a world where the sheer number of mutual funds, hedge funds and exchange-traded funds will make your head spin. Nearly half of all American households have exposure to mutual funds, Cramer said, which makes picking the right ones pretty important.
Cramer said overall he's not a fan of mutual funds. He said in addition to their high fees most fund managers don't get paid for performance, which explains why most actively traded funds fail to outperform the averages year after year after year. Even if a fund does manage to eke out a gain, Cramer said chances are its fees will strip you of most of it.
So which funds does Cramer recommend? He suggested investors look for low-cost index funds whenever possible, something that mirrors the S&P 500 with the smallest fees possible. Investors should especially avoid sector-based funds, as those don't offer enough diversification, and most ETFs, as those are designed for traders, not investors.One exception to this rule is the SPDR Gold Shares (GLD) ETF, which tracks the price of gold. Cramer said this fund is an excellent way to easily add gold to any portfolio.
Roth IRA or Traditional?With all this talk of individual retirement accounts and 401(k)s, the question inevitably arises of which type of IRA to start, a traditional IRA or a Roth IRA? Cramer offered his thoughts on the issue. Read More: 10 Stocks Carl Icahn Loves in 2014 Cramer said investors can open a Roth IRA if they earn less than $127,000 a year and they can withdrawal their money after age 59 and a half. The only difference between a Roth and a traditional IRA is whether you pay taxes now or pay them later. As a general rule, Cramer said if your marginal tax rate is less than 25%, then a Roth IRA will likely make the most sense. For those in higher tax brackets, paying taxes later on, such as in retirement when rates are lower, typically is better.
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