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NEW YORK ( TheStreet) -- Sometimes we need to “take a step back and talk about the big picture,” Jim Cramer told his Mad Money viewers as he dedicated tonight's show to helping them improve their financial life as well as managing their money.
"Sometimes that means we need to take a deep breath, step back from the day-to-day nitty gritty of the market, and focus on the educational side of things, what I call Investing 101," Cramer said.
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It’s pretty hard to invest if you don’t save any money to start with, Cramer said. Without savings, we’re hostage to Social Security, and nobody wants that. But by investing part of your savings in the stock market, investors can increase their wealth dramatically.
Eventually, by saving and investing your money, you’ll find the path to “real financial independence,” he said.
So where exactly should investors put their money? Cramer says investors should save 10% to 15% of their income and put half to two-thirds of those funds in a tax-sheltered retirement account. The rest of the funds should be put into a low-cost online brokerage account.
Investors should use their retirement accounts for lower-risk investments and use their standard brokerage account for taking larger risks. Younger people under the age of 30 can afford to take more risk, he added.
“You should have a retirement portfolio to make sure you’ve got enough money once you stop working,” Cramer said, “and you should also have a discretionary portfolio, where you can take more risks and use your gains to have some fun before you turn 65.”
Where to Begin?Now that we’ve decided to take the plunge into the investment world, where should we begin? Cramer said investors should avoid individual stocks until they have at least $10,000. Until then, investors should put their money to work in a cheap index fund that tracks the S&P 500, such as the Vanguard Five Hundred Index Fund ( VFINX) mutual fund.
If investors aren’t willing to do the homework of owning individual stocks -- which includes reading the company’s SEC filings, reading the earnings reports and listening to the conference calls -- then they should stay invested in mutual funds.
But if they are willing to do the homework and invest in individual stocks, investors need to remember to stay diversified, he said.
“I believe that a diversified portfolio of five to 10 individual stocks is the best way to go,” Cramer advised. No position or sector should take up more than 20% of an investor’s portfolio.
On the flip side, investors should try to limit their holdings to no more than 10 stocks. Beyond that, it’s unlikely that investors will be able to do the necessary homework to stay on top of each company’s operations, Cramer reasoned.
“You also have to research the company’s sector,” he stressed, “then compare the stock to its competitors to see if its valuation make sense.”
Again, for those who can’t commit to investing in individual stocks, “keeping your money in an index fund that mirrors the S&P 500 is a perfectly reasonable way to go,” Cramer reminded his viewers.