Cramer: The perfect hedge for when the market hits dangerous highs

The biggest mistake Jim Cramer sees investors make is thinking they are supposed to be fully invested at all times.

Heck, some money managers have even told him that they are supposed to have all their money in stocks.

This is complete nonsense!

Having cash on hand when a market correction occurs is the key to protecting a portfolio, Cramer says. Sometimes the market will stink, and there is nothing to do but just sit in cash.

Watch the full segment here:

"In fact, one of the chief reasons that I outperformed pretty much every manager in the business during my 14-year run as a professional money manager is that there were substantial blocks of time when I was largely in cash," the " Mad Money " host said.

Cash is the perfect hedge in an environment when the market hits dangerous highs and could protect from devastating losses.

Cramer considers cash the most underrated investment of all. Whenever he sees the market spike, he starts to sell a little and trim here and there to build up a supply of cash. He sells on strength and buys on weakness.

Otherwise, Cramer fears that investors could wind up selling their best stocks just to hang onto their worst stocks because the higher-quality stocks stopped going up — a big mistake.

However, investors must be aware that there are many circumstances that will cause the stock market to plummet. That means they need to be ready for a correction.

Having a pile of cash in your back pocket could mean the difference between good and bad stocks in your portfolio. And keeping a solid portfolio will ensure that it will be able to bounce back from a correction. That means having cash to subsidize, instead of selling high-quality stocks, so you can outperform the best money managers out there, too.

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