Time Horizon

• Your time horizon is a critical factor when choosing investments for your 401k. The further you are from retirement, the more risk you can afford to take with your portfolio. Conversely, the closer you are to your planned retirement date, the less you can afford to put your money at risk. If you are within five years of retirement, you should look at building a balanced mix of stocks and safer investments such as government bonds. If you are younger, you can look at maximizing your stock exposure in an attempt to boost your nest egg and grow your savings over time.
  
  

Risk Tolerance

• Everyone has a different tolerance for risk, and it is critical to look at your own risk tolerance before you start investing your 401k money. While younger investors can theoretically tilt heavily toward the stock market, if you feel you would panic and sell your holdings in a bear market, you might want to limit your exposure to the stock market, at least until you gain some real-world experience. But if you are comfortable with the risks and have many years to go until retirement, you can weight your 401k portfolio toward stocks and then slowly reduce your stock exposure as retirement gets closer.
  
  

Fund Costs

• Controlling costs is essential when investing for retirement, because even a small difference in expenses could make a huge difference over 20, 30 or 40 years. Compare the costs associated with each fund by reading the prospectus carefully. Many 401k plans include low-cost index funds, and these can provide an excellent alternative to more expensive managed funds.
  
  

Level of Involvement

• If you are comfortable moving money around and rebalancing your portfolio, choosing a mixture of stock and bond mutual funds can be a good choice. When you are younger and have decades to go until retirement, you can lean more toward stock funds, either low-cost index funds or managed funds with a strong track record of performance. As you get closer and closer to retirement, rebalancing your portfolio means shifting some of the money in those stock funds to safer investments such as government bonds.
  
  If you prefer to have a professional handle this rebalancing for you, consider a target date retirement fund. These funds work by automatically shifting assets from riskier investments such as stocks into more stable investments as retirement gets closer. Most 401k plans offer such a fund, and many plans now make target date retirement funds the default investment choice.