5 Tips From Jim Cramer On Becoming A Smart Investor

Investing intelligently requires a full toolbox of mental strategies and research methods designed to set you up for consistent success. No investor will ever get it right every time, but with well-rounded investment strategies at your back, making smart decisions on a routine basis can provide you with the best possible returns at every stage of your investment journey. One way investors can learn to incorporate better strategic decision-making is by listening to experts. Stock market experts like Jim Cramer can often deliver questionable or even poor financial advice, but they also dish out great tips on how to improve your investment portfolio and strategy in meaningful ways over the long term.

Cramer is a particularly visible personality in the world of stock market investments. He's hosted "Mad Money" for the last two decades, and while his delivery method is often called into question, interspersed throughout his ranting and raving lie quality stock analysis lessons and sometimes even a valuable stock pick. Even though Jim Cramer comes across as loud and excitable, his overarching strategic approach remains firmly within the camp of the consummate professional. These are five lessons you can learn from his advice and example in order to become a smarter investor.

1. Let index funds do the heavy lifting

First and foremost, Jim Cramer is a major proponent of the index fund. Index funds are some of the most approachable investment opportunities for beginners, in particular. They track with subsections of the stock market, or perhaps even the entire marketplace in some cases. An index fund mitigates risk by spreading out ownership throughout a large variety of individual company assets. Instead of buying one share of 15 companies (or 15 shares of one brand), a single share of an index fund grants you access to dozens if not hundreds of publicly traded companies. Their value is aggregated and an algorithm manages the portfolio's balance based on preset rules. All you have to do is sit back and relax.

Index funds open up the marketplace to investors who might not be ready to spend a considerable amount of time trying to pick out their own stock purchases. Instead, a Nasdaq or S&P 500 index fund, or one that follows small-cap companies, for instance, will reduce an investor's overall risk and provide you with wide market access. Generally speaking, professionals underperform the market itself at an increasing rate the longer they actively try to pick stocks. Instead of trying to beat the market, Jim Cramer and virtually every other investment analyst and adviser out there suggests joining it.

2. Consider pullbacks in trading as your trigger

Jim Cramer is quick to note that solid performance often draws in increasing investor attention. A quickly rising price results in an increase in purchase orders from investors eagerly trying to cash in on the positive momentum. However, the stock market is characterized by an incessant fluctuation that sees individual stock prices rise and fall in repetitive cycles. It's impossible to predict what the market will do with absolute certainty, but one thing that analysts note is a tendency for stocks to become overheated when trading enters these quasi-bull phases for any given commodity.

Investors like Warren Buffett know the stock market acts most in your favor when you buy with the long-hold designs on your investments. In this regard, the price you pay per share isn't the end-all be -all, although Buffett suggests that investors should always attempt to squeeze the best of value out of purchases). Jim Cramer adds some nuance to this lesson, telling investors that they should wait for a pullback in price before going all in on a rising star. Of course, you'll want to employ this strategy as part of a larger approach to leveraging buy orders and it won't always be worthwhile to wait for a reversal. But generally speaking, a dip in share price should act as one of many triggers for anyone looking to buy a stock on the rise.

3. Follow the stock buys of company executives

One piece of unique advice that Jim Cramer focuses on revolves around the actions of those in the know. Of course, insider trading is an illegal activity, and an investor is guilty of this when acting on confidential information to benefit their own portfolio. Cramer suggests that savvy investors should watch out for insider buying, a completely legal practice and one that he suggests telegraphs wider moves in the business landscape.

A pharmaceutical executive, for example, who dumps shares of the company days before news breaks of a failure to secure an important FDA approval would be guilty of insider trading. On the other hand, days after an approval is announced, if you see executives snapping up shares, then what you're really looking at is a newfound confidence in the company or a product's future that goes beyond routine positivity among staff (who tend to generally believe in the company's vision).

A smart investor looks at every piece of information available to them. It's common to seek out analysis on earnings reports and routine information about company priorities via news stories and other outlets. However, many investors overlook publicly available information about what company executives are up to. If they're doubling down on their business and showing supreme confidence in its future, there may be publicly available information to suggest future growth and those on the outside just haven't put two and two together yet.

4. Decrease portfolio risk with age

Risk is inherent in investment. Anything beyond a savings account, or another type of guaranteed trickle of interest through a bond or CD asset, for instance, comes with the potential to lose money. Investments in the stock market are never a guarantee, and companies can even go bust overnight under the most extreme of circumstances.

When saving for retirement, investors will want to utilize a sort of sliding risk scale. Early on in the journey, savers are incentivized to bet big on risky startups and other companies that may ultimately fail. If an investment pans out, it can lead to huge upside. For a young investor, there's still plenty of time to recover from a flop, however. When you begin to close in on your retirement, the appetite for risk and the potential to lose considerable value no longer factors as heavily into your stock trading recipe.

Jim Cramer is a loud proponent of rebalancing your portfolio as you age in order to slowly mitigate risk over time. Cramer even told the interest group AARP in 2021 that when he turned 65, he shifted his classic, 80% stock-driven portfolio into one that held 40% in stock assets, with 50% of Cramer's retirement war chest transformed into cash assets.

5. Always diversify your portfolio

Portfolio diversity is chief among wisdom doled out by stock market professionals. Jim Cramer is prominently among those who tout portfolio diversity as a key feature of any intelligent investor's savings. Diversification can come in a variety of ways. Firstly, Cramer and others agree that index funds should be a major priority as you begin your investment journey. Building a strong backstop with ETFs, index funds, and even REITs, will ensure your riskier investments are supported by a solid backbone pegged to the market itself.

Once you've built up this strength, you'll want to begin looking into ways to add diversity to your holdings. For many, this comes in the form of sector-specific stock buys. For example, you may find your portfolio is tech-sector heavy, so adding utilities, materials, or a manufacturing index fund or individual company can shift the balance slightly to add a unique angle.

Diversification ensures that no matter what happens in the marketplace, you will own something that's performing better than the rest. Investors who are looking for increased diversification opt for alternative assets altogether. Shifting your focus and purchasing gold bullion, real estate, or even cryptocurrency can add an even more nuanced dimension to your total holdings.