Jim Cramer’s 25 rules

In Jim Cramer’s Mad Money Show on Monday, he outlined 25 rules that he says will help investors play the markets defensively to avoid big losses and keep their money safe.

1. Stay Diversified. Cramer said diversification is the only free lunch in investing. He advocated not having more than 20% of your portfolio in any sector and avoiding having “two-of-a-kind” sectors/stocks at all costs. He recalled investors losing fortunes in the past when they sank all their money in hot stocks of the day such as dot.coms, telcos and energy merchandisers like Enron.

2. Buy and sell slowly. “Never buy or sell a position all at once” he said. Instead, buy into a position slowly, taking advantage of weakness, and take profits on the way up.

3. Your first loss is your best loss. “If your thesis on a stock changes, take the loss and sell,” Cramer told viewers. Don't let a trade turn into an investment by being afraid to sell. If the reason you bought a stock is no longer valid, you have to sell it, he said.

4. Dividends limit losses. Look for stocks that consistently grow their dividends year after year. As a stock's yield increases, it attracts new investors and helps limit the downside risk. You need only ask yourself, “Is the dividend safe?”

5. Its always good to have some cash. Professional investors always have cash on hand. Cash is a tool that should be used to buy quality companies after big market sell-offs.

6. Don't own too many volatile stocks. More than one volatile stock in a portfolio is not being diversified. Be honest and ask yourself if you can handle the wild price swings before investing in a volatile stock.

7. Know what you own. Knowing what a company does will help distinguish between a broken stock and a broken company and prevents panic selling.

8. Don't own low-dollar stocks. Stocks don't go to $2 and $3 a share because they're doing well. Speculating on low-dollar stocks can wipe out a portfolio.

9. Accounting irregularities equals sell. Stocks with accounting problems should be sold immediately and are off-limits until the issues are fully resolved.

10. Stay away for two good quarters following an earnings shortfall. It takes at least six months for a company to turn itself around after a big earnings miss. Investors should not wait it out.

11. When your broker stops talking about a stock, it's time to sell. Silence isn't golden when it comes to stocks. If your broker stops pushing a stock, it’s time to move on.

12. After a big run, get defensive. Check the S&P Proprietary Oscillator, a paid product, to determine if a stock is overbought or oversold. Plus or minus 5 is the key number to look for. Also check the Investor's Intelligence Bull/Bear Ratio, another great indicator of market sentiment on a particular stock.

13. If a stock's dividend yield is twice that of Treasuries, sell it. Dividends that reach that level should be a warning sign that the yield may be in jeopardy. There are two exceptions: oil tanker stocks, whose yield is based on their day rates, and master limited partnerships.

14. If a company has a new CEO, stay away. New CEOs need time to settle in and develop a plan, and that's not the time to own the stock.

15. Never turn a trade into an investment. If you bought a stock because of a specific catalyst, sell it when that catalyst changes or disappears.

16. Never sell “call” or “put” options. Selling a “call” option just gives away your upside. Selling a “put” option limits your upside, while still exposing yourself to all of the downside.

17. Never use margin. Buying stocks on margin is just dangerous. Once you get in the hole, you will never get out. Don't use it.

18. Never buy a stock at its all-time high. Be prepared to miss a stock rather than reaching to buy it at the high. Instead, wait for a 5% to 8% pullback before pulling the trigger.

19. Play with the house's money. Take money off the table as stocks go up until you've recovered your initial investment, then it doesn't matter as much what happens later.

20. Keep your head clear. When times get tough, it's OK to consider selling. You can always buy them back later at lower prices.

21. Contribute to retirement accounts throughout the year. Don't invest in that 401k all at once. Instead spread the payments out during the year and contribute more during the months when the market goes down.

22. Mutual funds should be diversified, too. If you have money in multiple funds, make sure they don't all invest in the same kind of stocks.

23. Playing defense is crucial in volatile markets. Don't wait for down stocks to recover. Bad stocks are likely to go even lower. Move on.

24. Invest in stocks with buyback programs. Companies that buy back their own stock offer a cushion to investors, helping to limit the downside risk.

25. Don't stop looking at your monthly statement. If you don't look at your monthly statements, you won't know how bad things really are. Keep your eyes open and stay current.