Did Jim Cramer Really Goof Up? Or Not?

A story popular on the Internet this week tries to make the case that the CNBC host Jim Cramer gave out terrible advice when he picked 49 stocks about six months back.

Touted as “no lose” propositions, the stocks as a group did lose ground, falling in value at about twice the rate of the overall stock market.

But hold on. Cramer makes a living at this, doesn’t he? Where did he go wrong?

First of all, absolutely nobody should be investing in six-month time frames. Secondly, owning 49 stocks is too few.

Third, no stock is a “safe” from declines, ever. To even claim that is senseless on the face of it. It’s a good headline, but Cramer knows better.

Specifically, Cramer suggested that the 49 picks were well positioned should a general stock downturn happen, which did. So he did screw up if the idea was to protect investors from losses.

On the other hand, it’s only a mistake if you sell and take the loss, and Cramer didn’t pick awful stocks, just stocks that were challenged in the short term.

So what should a prudent retirement investor do differently, if anything? Let’s go step-by-step here.

First of all, never market time. That’s a common problem even among people who think they’re investing for decades to come. They think they know something about the future when, objectively speaking, nobody knows anything about the future.

You won’t pick the right moment to get in or out of a stock. If you buy a stock and it falls in value, the logical (if difficult) move is to buy more. After 15 or 20 years you won’t remember or care at what price point you entered.

Second, buy stock markets, not stocks. You need exposure to large-cap and small-cap stocks in very broad numbers — hundreds and even thousands of individual companies, not dozens. Index funds achieve this very cheaply.

Thirdly, measure your returns in five-year increments at a minimum. You’ll find that the stock market will bring you a return of about 6.6% over long periods of time, if you reinvest the dividends. That’s what the research shows.

Low cost

You might think, well, I can beat that! No, you can’t. Bonds return less, with interest reinvested, commodities still less and cash is subject to inflation.

You can, however, build a portfolio of all of these assets and rebalance them periodically. That can add a percentage point or more to your overall return, if you stick to a strategy year in and year out and keep costs low.

Done correctly, your retirement portfolio will double in value roughly every 10 years. That’s the approach of pension plans and college endowments, and it works — no stock picking necessary.