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Cramer Remix: Why young investors should invest in speculative stocks
Unless you are born with a silver spoon in your mouth, there aren't many ways to become really wealthy. That is why Jim Cramer is so passionate about helping investors plan for a viable financial strategy.
"Thanks to the magic of compounding , the earlier in your life you start investing in the market, the bigger your long-term gains can be," the " Mad Money " host said.
For instance, if $100 is invested in the S&P 500 (INDEX: .SPX) and it gains 10 percent in a year, that will generate $110, after another year it's $121 and after a third year it's $133.
The gains will continue to get larger because each year, money is made from the previous year's profits. With that 10 percent average annual return, one can double their money in about seven years, Cramer said.
"The magic of compounding works best the younger you are, because that means you have more time for your money to grow," Cramer said.
For instance, if a 22-year-old is just entering the work force they have more than 40 years before they retire. They can invest $10,000 in an S&P index fund right now with the anticipation that the next 40 years won't be too different from the last 40 years.
When it comes to investing, Cramer always says there needs to be two discrete places for cash.
The first is a retirement portfolio, which is more conservative and should be invested through a tax favored vehicle like a 401(k) or an IRA.
The second is a discretionary or mad money portfolio. This is the place to take more risks with money once a retirement fund has been invested. The first $10,000 invested in the market should go to a low-cost index fund or ETF that mirrors the S&P 500. This way you can get exposure to the stock market gains without putting the time or effort needed to pick individual stocks.
One of Cramer's top rules for younger investors are that they should take more risk. That doesn't mean they should go crazy and speculate with all of their savings. But it does mean that Cramer recommends using some discretionary money to bet on high-risk long shots. That refers to smaller, less well-known companies with massive upside potential.
Cramer loves the public school system, but the truth is that it cannot be relied upon to teach children about money .
"If you want your children to become fluent in the language of finance, you are going to have to do it yourself," Cramer said.
That means not waiting until after kids go to college to teach them about financial literacy. Once kids go to college, they will be bombarded by credit card offers that could seem irresistible. Credit-card debt on top of student loans could send someone into debt for decades.
Cramer has always had the notion that excessive prudence can be one of the most reckless strategies of all. If too much money is invested in safe, risk-free U.S. Treasury bonds, that basically insures a very low return on an investment. So, for those who want to grow their capital, stocks are the only game in town.
Stocks are a tool to make money, Cramer said, and bonds are for capital preservation — for protecting money and providing a small, steady return that can offset the impact of inflation.
"Depending on how old you are, there is a huge difference in how you should approach the very idea of putting your money in bonds," Cramer said.
How much of a retirement portfolio should be kept in bonds versus stocks? Cramer broke it down by age:
20s: None
30s: 10 percent of your retirement fund; 20 percent if you are conservative
40s: 20 to 30 percent
50s: 30 to 40 percent
60s: 40 to 50 percent bonds
Post-retirement: Increase bond exposure to 60 to 70 percent
Additionally, Cramer doesn't subscribe to the "buy and hold" mantra that most do. He's all about "buy and homework." That means that no matter how confident one is in a company, they must keep checking up on it regularly to make sure nothing has gone wrong in the story.
When taking these investments into consideration for the long term, one thing became very apparent to Cramer: if you know what you're doing, a bear market is an opportunity.
A bear market refers to when the averages are down by more than 10 percent from their highs and seem like they could go lower.
"What I am saying is that when you are faced with a bear market … it probably makes more sense to start buying most stocks, rather than selling them, as long as you are willing to take some short-term pain," Cramer said.
The key is to be patient enough to take advantage slowly — so you don't buy too close to the top — and to be careful about the stocks chosen in a bear market. Do your homework and pick the stocks of companies that are doing well, or doing OK and could be doing better in a stronger environment.
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