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This program last aired Dec. 30, 2014.
NEW YORK (TheStreet ) -- What makes a good investor? Knowing to expect the unexpected, Jim Cramer said on Mad Money as he opened his investing tool box to help viewers become better investors.
But how should investors prepare for the next market catastrophe or stock pick gone bad? Not by being bearish but by being smart, Cramer said. Being a bear means shorting stocks. hoping they go down. That's a valid investing strategy but it limits one's profit potential since the lowest a stock can go is zero.
However, Cramer said, compare that to bullish investing, betting that stocks go higher. Their potential profits are limitless, he said. Investors who invested in Action Alerts PLUS holding Apple (AAPL ) in 2009, for example, realized a 580% gain over the next three years.
Beyond having a
positive outlook, Cramer said the most important rule to managing your money is diversification. That means not having all your eggs in one sector basket. A portfolio with five stocks must have only one technology company, one health care name, one energy company, one industrial, etc. Two or three of a kind is a quick way to get caught off guard, so no more than 20% of a portfolio can be in a single sector.
Being diversified is more than just investing in different sectors, however. Cramer said the new rules of diversification also require owning some gold in your portfolio along with a high-yielding dividend stock, a growth stock, a speculative stock and one that's firmly rooted in a healthy geography.
Check the Dividends
Cramer said the most important category of stocks that must be in a diversified portfolio is a high-yielding dividend stock. He said that every portfolio needs at least one, possibly more, dividend payers .