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This program was last broadcast on Sept. 8, 2015.
America's education system teaches us a lot of important things, Cramer told viewers, but one thing it doesn't teach is financial literacy. That's why he offered another peek into his playbook for successful investing.
Cramer's first lesson: the dos and don'ts of your 401(k). It's conventional wisdom that if your employer offers a 401(k) plan you should invest in it and, if possible, max out your contributions at the current limit of $18,000 a year, Cramer said. However, he is not one of those "conventional" thinkers because 401(k)s have good features and some pretty bad ones.
On the plus side, 401(k)s are tax-deferred vehicles, which means you don't pay taxes on the money you put in or on the capital gains you make. That means if a 30-year-old invests $5,000 a year for 30 years and gets a modest return of 7% a year, the $150,000 investment will be worth $511,000 at retirement. Since the tax rate will be lower during retirement, paying taxes later makes a lot of sense.
Also in the plus column, 401(k)s sometimes have employer matched funds, which is essentially free money, also provided tax free.
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. That's why Cramer only recommends 401(k) plans if they have an employer match. Once the match is met, he prefers investing in 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 he's not a fan of mutual funds overall. Besides 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 eek out a gain, Cramer said chances are its fees will strip you of most of it.
So what does he 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 because those don't offer enough diversification and most ETFs because those are designed for traders, not investors.