The question you should be asking yourself is this: "Why am I putting money into a 401(k)?" For many people, the answer is to grow a (large) nest egg and save for future retirement expenses. Investors are balancing risk and potential reward, so the asset categories you're putting your 401(k) contribution towards will be a reflection on how much risk you're willing to take. Per a US News & World Report article:
Ultimately, investors would do well to remember one of the key tenants
of investing: diversify. The narrower you are with your investments,
the greater your risk, says Vanguard's Bruno: "[Diversification]
doesn't ensure against a loss, but it does help lessen a significant
Generally, investing in your employer's stock in your 401(k) is considered very risk. In fact, one Forbes columnist recommends not putting any money into company stock. FINRA notes:
Simply stated, if you put too many eggs in one basket, you can expose yourself to significant risk.
In financial terms, you are under-diversified: you have too much of
your holdings tied to a single investment—your company's stock.
Investing heavily in company stock may seem like a good thing when
your company and its stock are doing well. But many companies
experience fluctuations in both operational performance and stock
price. Not only do you expose yourself to the risk that the stock
market as a whole could flounder, but you take on a lot of company
risk, the risk that an individual firm—your company—will falter or
In simpler terms, if you invest a large portion of your 401(k) funds into company stock, if your company runs into trouble, you could lose both your job AND your retirement investments.
For the other investment assets/vehicles, you should review a few things:
- Expenses - generally, the lower the expense, the more the investor keeps
- Asset type - indicates where the fund is planning on investing (e.g., large cap stocks, bonds, international, etc.)
- Fund management type - active or index. Active funds typically have higher expenses because the fund managers actively trade in an attempt to increase returns, while index funds are passively managed and mirror a specific index (e.g., S&P 500).
Personally, I prefer to keep my portfolio simple and just pick just a few options based on my own risk tolerance. From your fund examples, without knowing specifics about your financial situation and risk tolerance, I would have created a portfolio that looks like this when I was in my 20's:
- S&P 500 Index Fund (65%) - this index tracks the market relatively well and consists of large companies
- S&P MidCap 400 Index Fund (15%) - mid cap companies have the potential to grow faster than large caps, but are riskier
- International Large Cap Index Fund (20%) - add some international exposure to increase the diversification of my portfolio
I avoided the bond and income/money market funds because the growth potential is too low for my investing horizon. Like some of the other answers have noted, the Target Date funds invest in other funds and add some additional fee overhead, which I'm trying to avoid by investing primarily in index funds. Again, your risk tolerance and personal preference might result in a completely different portfolio mix.