Turnabout for Cramer: Use index funds

This may be one of the strangest investment stories of the year: Jim Cramer, the cable television madman who rants about buying stocks, now says most investors should use index funds. Wait a minute, this isn’t the same Jim Cramer who ran a hedge fund and whose Mad Money show on CNBC nightly touts individual stock plays, is it? You bet. Cramer’s newest book, “Jim Cramer’s Stay Mad for Life,” warns that individual investors almost never beat the stock market.

In the book, subtitled “Get Rich, Stay Rich (Make Your Kids Even Richer)” and written with Cliff Mason, Cramer advises that most investors will be better off using low-cost index stock funds. Cramer says investors who want to buy individual stocks better do a lot of research or “you’ll probably lose money.”

It is worth noting that Cramer was a typical hedge fund manager, rapidly trading into and out of securities in hopes of capitalizing on the latest information. He now says that new rules on the release of information by corporate executives make “trying to game short-term movements in stocks almost impossible.” In an interview with Business Week,  Cramer said that he doesn’t advise investors to do short-term trading because that is as misleading as telling them “you too can play in the NBA.” Cramer’s epiphany is backed by plenty of research on real world investors showing that those who trade more frequently have worse results on average than those who trade less frequently.

Although he isn’t too enthusiastic about diversifying a portfolio with bonds (“necessary and boring,” he says), Cramer’s book ends up giving the same sound financial advice that many financial advisors offer. He tells readers to make sure they have adequate insurance, to pay off credit cards to avoid unnecessary interest charges, and to contribute to 401k plans and individual retirement accounts whenever possible. He criticizes 401k plans that are filled with mediocre mutual funds and an employer’s stock, which he calls “the most dangerous investment you could ever make.”