Is it smart to only invest in mid- and small-cap stock equity funds in my 401(k)?
"If the stock market dropped 30%-40% next month, providing you with a rare opportunity to buy stocks at a deep discount, wouldn't you want to have some of your assets in investments other than stocks? If you don't otherwise have piles of new cash to throw into the market when it significantly tanks, then having some of your portfolio invested elsewhere will enable you to back up the proverbial truck and load up on more stocks while they are on sale. I'm not advocating active market timing. Rather, the way that long-term investors capitalize on such opportunities is by choosing a portfolio asset allocation that includes some percentage of safer assets (e.g. cash, short term bonds, etc.), permitting the investor to rebalance the portfolio periodically back to target allocations (e.g. 80% stocks, 20% bonds.) When rebalancing would have you buy stocks, it's usually because they are on sale. Similarly, when rebalancing would have you sell stocks, it's usually because they are overpriced. So, don't consider ""safer investments"" strictly as a way to reduce your risk. Rather, they can give you the means to take advantage of market drops, rather than just riding it out when you are already 100% invested in stocks. I could say a lot more about diversification and risk reduction, but there are plenty of other great questions on the site that you can look through instead." The benefit of the 401K and IRAs are that reallocating and re balancing are easy. They don't want you to move the funds every day, but you are not locked in to your current allocations. The fact that you mentioned in a comment that you also have a Roth IRA means that you should look at all retirements as a whole.  Look at what options you have in the 401K and also what options you have with the IRA. Then determine the overall allocation between bonds, stocks, international, REIT, etc. Then use the mix of funds  in the IRA and 401K to meet that goal. Asking if the 401K should be small and mid cap only can't be answered without knowing not just your risk tolerances but the total money in the 401K and IRA.  Pick an allocation, map the available funds to that allocation. Rebalance every year. But review the allocation in a few years or after a life event such as: change of job, getting married, having kids, or buying a house. "Can you easily stomach the risk of higher volatility that could come with smaller stocks? How certain are you that the funds wouldn't have any asset bloat that could cause them to become large-cap funds for holding to their winners? If having your 401(k) balance get chopped in half over a year doesn't give you any pause or hesitation, then you have greater risk tolerance than a lot of people but this is one of those things where living through it could be interesting. While I wouldn't be against the advice, I would consider caution on whether or not the next 40 years will be exactly like the averages of the past or not. In response to the comments: You didn't state the funds so I how I do know you meant index funds specifically? Look at ""Fidelity Low-Priced Stock"" for a fund that has bloated up in a sense. Could this happen with small-cap funds? Possibly but this is something to note. If you are just starting to invest now, it is easy to say, ""I'll stay the course,"" and then when things get choppy you may not be as strong as you thought. This is just a warning as I'm not sure you get my meaning here. Imagine that some women may think when having a child, ""I don't need any drugs,"" and then the pain comes and an epidural is demanded because of the different between the hypothetical and the real version. While you may think, ""I'll just turn the cheek if you punch me,"" if I actually just did it out of the blue, how sure are you of not swearing at me for doing it? Really stop and think about this for a moment rather than give an answer that may or may not what you'd really do when the fecal matter hits the oscillator. Couldn't you just look at what stocks did the best in the last 10 years and just buy those companies? Think carefully about what strategy are you using and why or else you could get tossed around as more than a few things were supposed to be the ""sure thing"" that turned out to be incorrect like the Dream Team of Long-term Capital Management, the banks that were too big to fail, the Japanese taking over in the late 1980s, etc. There are more than a few times where things started looking one way and ended up quite differently though I wonder if you are aware of this performance chasing that some will do." Your initial premise (mid-cap and small-cap company stocks have outperformed the market) is partially correct - they have, over many 40 yr periods, provided higher returns than large caps (or bond funds). The important thing to consider here is that risk adjusted, the returns from a diversified portfolio are far more robust - with proper asset allocation you and expect high returns and reduce your risk simultaneously.  Imagine this scenario - you decide to stick to small / mid caps for 10 - 15 yrs and move into a more diversified portfolio then. Had you made that decision during a sustained period of poor small cap performance (late 80s or the 40's) you would have lost a boatload of return, as those were periods were small / mids underperformed the market as a whole, and large caps in particular. As an example, from 1946 to 1958 large caps outperformed small every single year. If 2016 were to be the first year of a similar trend, you've done yourself a major disservice.  Since the dot com crash small /mids have outperformed for sure, pretty much every year - but that doesn't mean that they will continue to do so. The reason asset allocation exists is precisely this - over a 40 yr period, no single asset class outperforms a diversified portfolio.  If you attempt to time the market, even if you do so with a multi-decade time horizon in mind, there a good chance that you will do more poorly.
The S&P top 5 - 401(k) usually comply with the DOL's suggestion to offer at least three distinct investment options with substantially different risk/return objectives. Typically a short term bond fund. Short term is a year or less and it will rarely have a negative year. A large cap fund, often the S&P index. A balanced fund, offering a mix. Last, the company's stock. This is a great way to put all your eggs in one basket, and when the company goes under, you have no job and no savings.  My concern about your Microsoft remark is that you might not have the choice to manage you funds with such granularity. Will you get out of the S&P fund because you think this one stock or even one sector of the S&P is overvalued? And buy into what? The bond fund? If you have the skill to choose individual stocks, and the 401(k) doesn't offer a brokerage window (to trade on your own) then just invest your money outside the 401(k). But. If they offer a matching deposit, don't ignore that. "I didn't even have access to a 401(k) at age 24.  You're starting early and that's good.  You're frugal and that's good too.  Retirement savings is really intended to be a set it and forget it kind of arrangement.  You check in on it once a year, maybe adjust your contributions.   While I applaud your financial conservatism, you're really hamstringing your retirement if you're too conservative.  At age 24 you have a solid 30 years before retirement will even approach your radar and another 10 years after that before you have to plan your disbursements.  The daily, monthly, quarterly movements of your retirement account will have literally zero impact on your life.    There will be money market type savings accounts, bond funds, equity funds, and lifecycle funds.  The lifecycle fund rolls your contributions to favor bonds and other ""safer"" investments as you age. The funds available in retirement accounts will all carry something called an expense ratio.  This is the amount of money that the fund manager keeps for maintaining the fund.  Be mindful of the expense ratios even more than the published performance of the fund.  A low fee fund will typically have an expense ratio around 0.10%, or $1 per $1,000 per year in expense.  There will be more exotic funds targeting this or that segment, they can carry expense ratios nearing 1% and some even higher. It's smart to take advantage of your employer's match.  Personally, at age 24, at a minimum I would contribute the match to a low-fee S&P index fund." In summary, you are correct that the goal of investing is to maximize returns, while paying low management fees.  Index investing has become very popular because of the low fees.  There are many actively traded mutual funds out there with very high management fees of 2.5% and up that do not beat the market.  This begs the question of why you are paying high management fees and not just investing in index funds. Consider maxing out your tax sheltered accounts (401(k) and ROTH IRA) to avoid even more fees on your returns. Also consider having a growth component of your portfolio which is generally filled with equity, along with a secure component for assets such as bonds.  Bonds may not have the exciting returns of equity, but they help to smooth out the volatility of your portfolio, which may help to keep peace of mind when the market dips. All the answers that show the equivalency of 401(k) pre-tax and Roth 401(k) post-tax using equivalent contributions are correct assuming equivalent tax rates upon withdrawal. There is some potential gain if your tax rate upon retirement is higher than your working tax rate, but often people calculate a smaller percentage of their working income for their retirement income, which may offset a higher tax-rate anyway. In my mind, the primary advantage of a Roth 401(k) is that it effectively allows you to contribute more for retirement if you are currently maxing out your contributions in a regular 401(k) and IRA and want to contribute more. Doing so can be a big advantage when you are young and can benefit from those additional dollars being put into your retirement account early. This is effectively what is illustrated by the Fidelity calculation, and is something to consider if you are of the mind to aggressively save early for retirement. The reason Roth allows you to contribute more is because traditional IRA contributions are capped. Suppose the cap is $5500. Suppose also you immediately rollover your traditional IRA to a Roth IRA. This is a post-tax contribution, and growth on that is tax-free. If you maxed out your employer pre-tax 401(k) to $17500 and maxed out your IRA, you have maxed out your retirement contributions to $23000. Suppose two doublings, then the 401(k) has grown to $70000, and the IRA has grown to $22000. However, the withdrawal from the 401(k) is taxed, so assuming 25%, the total is $74500 after tax. Now, suppose instead you maxed out your employer Roth 401(k) post-tax instead, so you have put in $17500 post tax. And now, also max out your IRA. Now, all of your $23000 grows tax-free. So upon two doublings, you walk away with $92000. This is because you maxed out your contribution post-tax, meaning it was as if you were allowed to contribute $23333 to your pre-tax 401(k). So if you intend to max out your retirement account contributions, and are looking to contribute even more to retirement accounts, one way is two change over to contributing into the employer Roth 401(k). "Usually it makes sense to invest in individual companies when you're investing in a ""hot"" sector. Secular funds have their own risks that can be difficult to measure. First Solar is one of the premier PV players. The fund gives you a false sense of diversification. If you bought a mutual fund in 2000 in the computer space, you'd have pieces of HP, Dell, Apple, IBM, EMC, Cisco, Intel etc. Did the sector perform the same as the companies in it? Nooo. As for renewable energy, IMO that ship has sailed for the ""pure play"" renewable stocks. I'd look at undervalued companies with exposure to renewables that haven't been hyped up. (or included in a sector mutual fund) Examples for this area?  The problem with this sector is that the industry is dependent on government subsidies, and the state of government budgets make that a risky play. Proceed with caution!" "(This answer refers to the US investment landscape) I'm not sure your classification of funds as direct and regular accurately reflects the nature of the mutual fund industry.  It's not the funds themselves that are ""direct"" or ""regular.""  Rather it's the way an investor chooses to invest in them.  If you make the investment yourself through your brokerage account, you may say it's a direct investment.  If you pay a financial advisor to do this for you, it's ""regular."" For a given fund, you could make the investment yourself or you could use an advisor. Note that many funds have various share classes.  Share classes may be accessed in different ways.  The institutional class may be accessible through your 401(k) or perhaps not even there, for example.  The premium class may require a certain minimum investment.  Some classes will have a front-end-load or back-end-load.  Each of these will have a different expense ratio and fees even though the money ends up in the same portfolio.  These expenses are, by law, publicly available in the prospectus and in numerous other places.  Share classes with higher fees will earn less each year after fees, just as you suggest.  Your intuition is correct on this point. Now, there is one fee to be aware of that funds either have or do not have.  That's a 12b-1 fee.  This fee is a kickback to financial advisors who funnel your money into their fund.  If you use a financial advisor, he or she will likely put your money into these funds because they have a financial incentive to do so.  That way they get paid twice: once by you and once by the mutual fund.  It has been robustly shown in the finance academic literature that funds without this fee dominate (are better in some ways and in no ways worse than) funds with this fee. I suppose you could say that funds and share classes with a 12b-1 fee were designed for ""regular"" investment and those without were designed for ""direct"" but that doesn't mean you can't invest in a 12b-1 fee fund directly nor that you can't twist your advisor's arm into getting you into a good fund without a 12b-1.  Unfortunately, if you have this level of knowledge, then you probably don't need a financial advisor." To expand on mhoran's answer - Once you mention the 401(k), we're compelled to ask (a) what is the match, if any, and (b) what are the expenses within the funds offered.  Depositing to get the full match is going to get you the biggest return on your money. It's common to get a dollar for dollar match on the first 5 or 6% of your income. If the fees are high, you stop at the match, and move to an IRA for the next money you wish to save.  At 22, I'd probably focus on the Roth. If you have access to a Roth 401(k), that's great, the match will be pre tax dollars and you'll get started with a decent tax status mix.  These accounts can form the core of your investing. Most people have little left over once their retirement accounts are fully funded. And yes, reading to understand stocks is great, but also to understand why stock indexing is the best choice for most investors. My employer matches 1 to 1 up to 6% of pay. They also toss in 3, 4 or 5 percent of your annual salary depending on your age and years of service. The self-directed brokerage account option costs $20 per quarter. That account only allows buying and selling of stock, no short sales and no options. The commissions are $12.99 per trade, plus $0.01 per share over 1000 shares. I feel that's a little high for what I'm getting. I'm considering 401k loans to invest more profitably outside of the 401k, specifically using options. Contrary to what others have said, I feel that limited options trading (the sale cash secured puts and spreads) can be much safer than buying and selling of stock. I have inquired about options trading in this account, since the trustee's system shows options right on the menus, but they are all disabled. I was told that the employer decided against enabling options trading due to the perceived risks.