An investment portfolio is typically divided into three components:
- US stocks
- International stocks
- Assorted bonds (mostly US treasury and corporate bonds with good credit ratings)
- Cash (US dollars) (doesn't really count because until you're reeally close to retirement you shouldn't have any appreciable sums here because you can do a lot better elsewhere. note that having an emergency fund in a bank account is worthwhile but shouldn't be counted with your investment portfolio.)
All three of those can be accessed through mutual funds or ETFs. A 401(k) will probably have a small set of mutual funds for you to pick from. Mutual funds may charge you silly expenses if you pick a bad one. Look at the prospectus for the expense ratio. If it's over 1% you're definitely paying too much. If it's over 0.5% you're probably paying too much. If it's less than 0.1% you have a really good deal.
US stocks are generally the core holding until you move into retirement (or get close to spending the money on something else if it's not invested for retirement). International stocks are riskier than US stocks, but provide opportunity for diversification and better returns than the US stocks. Bonds, or fixed-income investments, are generally very safe, but have limited opportunities for returns. They tend to do better when stocks are doing poorly.
When you've got a while to invest, you should be looking at riskier investments; when you don't, you should be looking for safer investments. A quick (and rough) rule of thumb is that "your age should match the portion of your portfolio in bonds". So if you're 50 years old and approaching retirement in 15 years or so, you should have about 50% in bonds. Roughly.
People whose employment and future income is particularly tied to one sector of the market would also do well to avoid investing there, because they already are at risk if it performs badly. For instance, if you work in the technology sector, loading up on tech stocks is extra risky: if there's a big bust, you're not just out of a job, your portfolio is dead as well.
More exotic options are available to diversify a portfolio:
- Commodities, especially precious metals (gold, silver, platinum, palladium) - potentially a crisis hedge
- Emerging market stocks (a particularly risky international investment)
- Emerging market bonds (similar)
- Currencies (other than the US dollar)
- Real estate (possibly through investment trusts)
While many portfolios could benefit from these sorts of holdings, they come with their own advantages and disadvantages and should be researched carefully before taking a significant stake in them.