Build and preserve your wealth we live in a world where its increasingly difficult to become rich if you werent born that way. Love it or hate it, i believe the stock market is the best ladder we have in this country for social mobility. There are millions upon millions of people in this country, but there simply arent that many jobs that pay you a salary fat enough to actually make you rich even if youre a total cheaps skate and save nearly every single penny you earn, the truth is you want to become really wealthy in this country, unless youre born with a silver spoon in your mouth, planning your Financial Strategy for on entire lifetime if you dont have a super high paying job, as long as you save a decent chunk of your paycheck and invest is wisely year after year, you can make your wealth grow, you become, if not filthy least, at least, very least, financial lly indpept meaning y dont need to worry about your job security, where your next paycheck is going to come from youll be able to retire easily without the need to rely on social security, all we know might not be around we our younger viewers hit retirement age. Thats why tonight, tonight i want to help you figure out the best way to manage your money in order to help achieve real Financial Independence house of pleasure but in order to do that, we need to talk about the concept of generational investing because the kind of strategies that make sense when youre young and in your 20s are very different from the sort of things you should be doing when youre middleaged, or a Senior Citizen for that matter. We dont talk enough about that on mad money. Tonights digit. Different. Theres one constant when it come to managing your finances no matter how old you are. Thats the fact you will never get a better opportunity to make your money wheby investing in t stock market even when were in a bear market [ bear ] when the action is treacherous, it feels like stocks go down every single day, when you take a longterm view, its easy to see the stock market is by far the most effective method of Wealth Creation out there. Sure, it might go down for weeks, for months. Might go down for year it might crash like it does upon occasion but if you take the long view, the very long view, stocks tend excuse me, stocks tepid tend to go higher. I dont say that as some sort of poll yanna when i got started in the business in the 1980s the Dow Jones Industrial average was trading in the 800s. Despite multiple bear markets between then and now the dow currently stands what you might call well above that mark, right . A pretty fantastic amount of Wealth Creation. Hallelujah no matter how old you are, no matter how wealthy you are, you really should have some your money socked away in this, the stock market for those who are concerned the market is rigged, dangerous, simply too unreliable or unsafe a place to trust your savings, can i give you Historical Perspective right now . If you go all the way back to 1928, thats right, before the great stock market crash that preceded the great kdepression, through the end of 2015, average annual return for the s p 500 including dividends is about 10 . Show me an asset class with a better average return. You cant do it. Stocks arent just the best game in up to, theyre the only game in town if your goal is to grow your wealth. For those who want to get rich quick, rather than the average 10 from the s p 500, i know, may not seem like such an impressive number. Some are probably saying thanks for nothing. Wait a second, youre wrong, youre just wrong. Forget the fact its more than double what you can expect from a 30year treasury, deposit, i mean, they lets examine that 10 figure in absolute terms when youre taking a longterm view, which is what were doing tonight, meaning planning for your entire lifetime, racking up a 10 return from a simple inexpensive s p 500 index fund which you know i prefer starts to seem pretty darn impressive sure, the market is going to have its up years and its down years but overa s but over a loh timeframe, the 10 figure including dividends held steady. 10 return in an average year, you need to view this number through the lens of whats known as compound interest sometimes ill talk about this as the magic of compounding. Think of it like this. If you invest 100 in the s p 500, and it gains 10 in the first year, then youve got 110 after another year pof of 10 gains, you got 121. A third year of the same gives you 133. They keep getting larger and larger because each year youre making additional money off the previous years profit eventually with a 10 average return, youll double your money in roughly seven years now for those of you who are really young, right out of college, waiting seven years to double your money, i know, seems like an eternity and listen, ive got more risky ways of growing your capital faster if you stay tuned however, the truth is, as you get older, an investment that can pretty consistently, you know, take your money up in seven years time and double it, ill tell you it just becomes pretty incredible. That said, the magic in compounding works the best the younger you are, that means you have more time for your money to grow sadly, young people are the least likely to be impressed by that steady Capital Appreciation thats why a claimed economist, George Bernard shaw, famously said youth is wasted on the young. Okay, wasnt a so let me do my best to make these numbers sound more impressive. Were going to walk you through it suppose youre 22 years old and youre just entering the workforce. You got more than 40 years before youre expected to retire so lets say you invest 10,000 in an s p 500 index fund right now. And lets also suppose that the next 40 years arent too different from the last 40 years. In that case, if the average return from the s p 500 holds steady at around 10 , then in 4 decades your 10,000 investment will turn out to be worth more than 450,000. Thats enough to send multiple children through college, grad school, buy a nice house in most parts of the country, pay for a huge chunk of a pretty ritzy retirement that monster multiyear gain, it didnt require any kind of stock picking. It doesnt require you to trade or time the market or even do any sort of research into individual companies. Which i know is hard for most of you. You just need to invest your money in a lowcost s p 500 index fund, or etf, commissions there then you wait. Granted youre waiting 40 years. 450,000 when youre approaching the age many people retire seems more than the initial 10,000 investment you made when you were young and had your entire work life ahead of you to make money the regular way. So, please, im begging you, think of it like this. A little money saved and passively invested in the stock market is the easiest way possible when youre young to turn turn into a massive fortune when youre old. And i have all sorts of additional costs and responsibilities. Have all sort additional costs and responsibilities. Have all sortsa costs and responsibilities all you have to do after you initially save the money, let it sit on the sideline, so you dont have to pay Capital Gains or dividend taxes on your gains. Same logic applies if youre 30, 40, even 50. You get a lot more bang for your buck if you start younger which brings me to the bottom line, even if you dont have time to do homework, the stock market is still the best tool out there for growing your wealth and thanks to the magic of compounding, the earlier in your life you start investing in the market, the bigger your longterm Capital Gains can be of course, not just Capital Gains but also dividends everything gets reinvested lets go to brenton in new mexico brenton . Caller jim cramer, big booyah from the land of enchantment. How are you, 123sir . I am good, how about you . Caller im doing good. Thank you. General question mutual funds and index funds claim minimizing single stock risk. Right. Caller but inherently isnt it fair to say mutual funds and index funds have other risks that you would avoid with a single stock portfolio absolutely. And i think that thats why i always suggest that there be two portfolios there should be that capital preservation and somewhat appreciation fund, that is going to be we put that aside for retirement and that should be in a diversified fund, preferred to be in index fund, and the rest should be mad money, a sliver of it, though, mad money, we pick individual stocks. Thats why we call the show mad money. I dont want the bulk of your portfolio in individual stocks theres too much single stock risk i want you to be able to pick stocks i know you want to do it or you wouldnt be watching the show. Brian in oklahoma. Brian . Caller thanks for having me, firsttime investor. How do you value a companys one Company Versus another measure their value . Well, we spend a lot of time and get rich carefully talking about that and what you really trying to do is measure the future earnings stream you can figure out what youll pay for the earnings stream now. What really matters is if you take a longer term view, you can get a feel for what that stock might be able to give you for dividends and Capital Gains. Dividends tep dividends tend to be for capital low preservation. The Capital Gains is for the appreciation stream. I want you to have little bit of both but you got to be thinking about what a company can earn in the future thats what dictates stock prices this show is about helping you build and preserve your wealth the stock market is the best tool out there to do that. A lot more mad money ahead including the fourletter word of the investing world what it is and why the conventional wisdom about it is all wrong. Plus im not pulling any punches here what you absolutely must not be doing in your retirement account. And im unveiling the rules you need to navigate in the bear market so stay with cramer. Dont miss a second of mad money. Follow jimcramer on twitter have a question . Tweet cramer, madtweets send jim an email to madmoney cnbc. Com. Or give us a call at 1800743cnbc. Miss something head to madmoney. Cnbc. Com. Take control of your financial future with the new madmoney. Cnbc. Com. Cramers exclusive ceo interviews full episodes. Analysis even your own soundboard plus special access to mad money 101 with rules and techniques to break down the market for all investors the red flag that makes me drop a stock immediately is its everything you need right when you need it the new madmoney. Cnbc. Com. At ally, we offer low rates on home loans. But if thats not enough, we offer our price match guarantee too. And if thats not enough. We should move. Our home team will help you every step of the way. Still not enough . Its smaller than id like. Well help you finance your dream home. Its perfect. Oh, was this built on an ancient Burial Ground . Okay. Then well have her cleanse you house of evil spirits. 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Tonight were talking generational investing meaning how to handle your finances depending on whether youre old or young, or somewhere in between as much as many of us might not want to admit it, the rules in this game can be totally different depending on what age you are. Nobody would suggest that a retiree pour all of his or her money into high risk speculative stocks that could either have enormous upside potential or go all the way to zero and absolutely wreck your portfolio. Just because some of this may sound straightforward doesnt necessarily mean its obvious or standard which is why im taking the time to go over the really important differences depending on where you are in your life cycle. Now, i always tell you you need two discreet policies, retirement portfolio, conservative, invested in taxfavored vehicles through a 401 k , i. R. A. And discretionary mad money portfolio, hence where the name comes from, you can start taking a few more risks with your much once you already topped out your Retirement Fund. No matter how old you are, retirement objectives must always come first. I love to play with the discretionary mad money side of things, thats what this shows arbout but a truth is a bet on retirement is a bet on your own longevity you want to live a ong time and shouldnt have to work your fipgers to the bone. That means planning for retirement from the moment you get your first paycheck. Regular viewers know my rules, no matter what you are, the first 10,000 you invest in the market should go straight into a low Cost Index Fund or etf that mirrors the s p 500. Index funds are fabulous way to get exposure to the stock markets gains without putting in the kind of time or effort thats necessary, what we do around here, picking individual stocks hey, if you dont have the time or inclination to pick individual stocks, can come via the fund that mirrors the s p 500. Im fine with that no reason this needs to be incredibly complicated its very important you actually get yourself exposure to the market no other asset class can build your wealth the way equities do. Once you save more than 10,000, that means you have enough money to start a diversified portfolio of five stocks remember, anything less than five stocks in five distinct sectors, youre not really diversified. Take the money, invest it in individual companies for your retirement portfolio only once you saved a large enough amount of money for retirement that we Start Talking about that discretionary portfolio where you can afford to take more risks i really want to make this point because a lot of people think i only waunt you to be in individual stocks. Thats just wrong. Index funds then individual stocks when youre younger your retirement and discretionary portfolio may not look that different. Thats true for a host of reasons. When youre still in your 20s or even your 30s, if you i venvestn something risky and crushes your portfolio, you still got a lot f of time to make the money back years and years and years of paychecks. However, if youre pushing approaching retirement, you lose a portion in the stock market, thats a real problem and you going to have very little time to fix it. Which brings me to my first rule of generational investing, not only can younger people afford to catake risks with their mone that older folks cant, those in the younger demographic, its imperative that you take those risks. You shouldnt go crazy and speculate, all of your savings, you should absolutely devote some of your discretionary mad money portfolio for betting on long risk high shot. I believe in this. Im talking about smaller less wellknown companies with massive upside potential couple with enormous Downside Risk if things go wrong. Remember, this is for the younger cohort the classic example, biotech stocks which fly through the roof if they get a big drug afroou abeautifa approv approval by the same target the smaller biotechs will get slammed if theres negative news and the stock is difficult to own in more negative markets because they dont have dividend or earnings protection. However, were talking about longterm investing, looking for good opportunities that work regardless of whether were in a bull or bear market. There are plenty of Speculative Companies that dont have anything to do with the drug business why do i insist younger investors speculate, take risks that might scare older people . Because the gains here can be absolutely stunning. Hallelujah it would be downright foolish to pass up owning the when youre in your 20s and 30s you should be investing like a youngeyoun er person, not an old man let me give you an example that sheds light on the situation when mad money initially came on the air in 2005, our first ceo interview was with dr. Len shrifer. At the time, a biotech that had been kicking on for 17 years without really developing anything noteworthy that could move the needle. Since then, though, this company has become a powerhouse with the stock taking off into the stratosphere based on the surprising strength of a drug called alea, blockbuster Macular Degeneration formula. Fast forward ten years into summer 2015, the stock traded up to 592 million. For the sake of using round number in this example, lets call it 500 bucks. Ten years ago. Could have bought regeneron, speculation 5 bucks. What would happen to the 500 bucks buying it at 5 . How about this a gain of rough ll lly 9,900 . Not a double not a triple not a quadruple. No, regenron is a ten bagger but you never could have gotten in on that gigantic gain if you hadnt taken a little risk in 2005 and bought a company with no profits, no products on the market and only the promises of the ceo that things would work out. Of course, regeneron worked out in major way similar small cap biotechs have done nothing or lost you enormous sums over a short period of time tor loing e or ld you wont always be able to identify who are the winners in this kind of space but thats okay as long as you cast a large net. Taking small positions in ten little speculative biotechs, id said nine of them are going to zero as long as the tenth one was regeneron, you would have made a monster game this should be one small part of your diversified mad money portfolio but absolutely belongs there. The risk reward of trying to find speculative winners splut s absolutely makes sense when youre young older investors, speculation is a much more risky game and only recommend playing it with excess cash you absolutely can afford to lose. Heres the bottom line remember to speculate while youre still young enough to be able to take the hit if something goes wrong as long as youre disciplined and only makes a small part of your discre