Jim Cramer Recommends Index Funds

I told you Jim Cramer (host of CNBC's "Mad Money") didn't know stocks. Now he says most others don't as well.

MSN Money has an article on Cramer's newest book where he admits that most investors never beat the market -- and as a result they should invest in index funds. The highlights:

Most people actually won't get rich by buying individual stocks, Cramer says. Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes.

For Cramerites willing to do the research, the book helps construct a long-term, diversified portfolio. For most people, however, he advises low-fee stock index funds.

Who has time to spend an hour a week researching for each stock they own? Hardly anyone. If you own seven stocks, this means you need to spend seven hours EACH WEEK researching. I don't know anyone who has that amount of time. And that doesn't guarantee success. Look at mutual fund managers and their staffs who spend hours and hours each week researching stocks -- most of them can't even beat the market averages.

That's why I stick with index funds. They get me a great return for minimal work. I'm glad to see that Cramer is finally admitting this is the way to go as well. :-)

Comments

[Gatorzone]

Very interesting to hear this coming from Mr. Mad Money! I am a huge believer in low-cost Index funds held long-term. Good post.

[My New Choice]

I'm also a big fan of low-cost index funds and that is the foundation of my investments. From what I have read of Cramer, he has typically recommended stocks in your "mad money" account as opposed to investing every single penny of retirement savings into trying to select your own stocks.

His latest book does give more attention to using index funds but the focus of this book is a little different than his previous books. In my opinion, Cramer is not changing his message but is enforcing the idea that your core retirement savings should be in a vehicle such as index funds and the individual stocks are for your speculative trading account with surplus money.

[Jake]

Another way to look at it --

Lets say that it takes 10 stocks to adequately diversify... those 10 stocks require ~500 hours of work per year to research by Cramer's logic.

If you do this, lets go out on a limb and figure you can boost your returns by 2%. What portfolio size makes this worth your time?

If you value your time at $10 per hour, you would need the 2% boost to profit you by $5000, which would require a $250,000 portfolio. The relationship is linear -- if your time is worth twice that much ($20), your portfolio would need to be twice as big to justify it ($500,000). If you think you could only get a 1% annual boost, the portfolio numbers need to be twice as big.

For me, with a <$50,000 portfolio, even if I could add 10% to my annual returns this year by spending 500 hours, I would only be making $10 an hour.

So, index funds.

[aaktx]

It is humorous and ironic that a host of a show about investing in individual stocks recommends index funds. I think his comments recommending index funds points to the futility of the investment media. This has been belabored by numerous economists(Malkiel, et al) and needs to be recommended again. It is amazing to me how many people make a living in this industry(investment media, brokers, actively managed mutual funds, hedge funds) and continue to do so despite pretty firm evidence to support the buy-and-hold strategy of index funds. A fool and his money are easily parted.

[FMF]

Jake --

That 2% is a huge assumption. Most mutual fund managers spend 60-70 hours per week (not to mention their teams of people) and they can't outperform index funds -- so why do "regular" investors think they can?

That's a point that's always puzzled me.

[Jake]

"That 2% is a huge assumption"

Yup... that's why I called it "going out on a limb".

On the other hand though, mutual fund managers deal with many handicaps that people don't have to worry about with their personal accounts:
-- quarterly and annual time horizons
-- investment universe restrictions
-- the big one: having to manage balances tens or hundreds of thousands of times as large as a personal account.

Outperforming indices is much easier in the microcap market than the large cap market, illustrating this point.

That said, I'm still in index funds for the time being.

[David]

Cramer has always reccommened index funds for people who are not willing to do there homework (1 hr a week per stock). He always says on his show... "if you dont have time... just stick your money in an index fund or else you'll lose money". I think why people are just picking up on it now is that he wrote it in his new book and they never watch/watched his show.

[Mrs. Micah]

Wow, seeing the light. Good for him, I guess.

[LC]

Our family invests heavily in index funds. However, I would say that ~30% of our portfolio is individual stocks. My husband does spend a fair amount of time researching stocks, but I don't think it is as much as the article claims. He bought 4 new stocks this year and owns about 20 others. He spent about 1 full weekend researching all of his stocks, with emphasis on the new ones. That being said, at the end of it all, his best stocks ended up being the ones that the Motley fool recommended. He does seem to do pretty well compared to the market but I don't know specifics.

[Bronco]

He is also now recommending gold. Time to short it?

[Richard]

Cramer knows the money is not in picking stocks, it's in being an entertainer on television.

[Bronco]

...and book royalties

[TreyD]

I like index funds and ETFs as well. However I have read that the age old line of most mutual funds not beating the market is false. There have been a lot of studies that showed the exact opposite, but of course that is not as interesting for the media. Most institutional investors who have billions and billions of dollars have tons of resources and analysts to research stocks but the bulk of their money is still invested in various mutual funds. I've held several funds for at least a decade and they have outperformed the market by a large margin. Another thing to remember is that no one can mimic the market, even the biggest index funds don't mimic the market - everyone has what is called "tracking error" and then of course their associated expenses and most of all TAXES. Remember, you pay taxes for the realized gains inside your mutual fund. Index funds constantly have to trade their positions to track the market as money comes in and out, etc. The market return has NO TAX liabilty - but you do.

[Tommy T.]

First statement of the article is "I told you Jim Cramer doesn't know stocks", then goes on pitching everything else he says to justify the author's own beliefs.

The fact of the matter is that if you read or watch Cramer enough, he'll eventually say something which you want to hear. I simply say "Jim knows absolutely nothing"! It really is simple as that. No matter what he says, the window for which it is valid is no more than 3 to 5 days - just long enough for the Cramerites to forget.

He is nothing more than an egotistical attention thriving bozo. He's proven it long before he found his niche as the madman on CNBC.

[FMF]

Trey --

I'll need to see some proof before I believe any of your assertions. I don't think they're accurate.