If you have a 401(k), invest at least the minimum amount necessary to get the maximum matching contribution from you employer. After that, it's a matter of selecting you investment options within the program. Many have garbage investments from firms with poor performance track records and high expenses (the two typically go hand in hand). Here are some basics for a 401(k) neophyte:
1) Buy a target-date fund if you're not investment savvy: They reallocate assets to become more conservative as you approach retirement, decreasing volatility and preserving your assets while maximizing returns in the early years.
2) Buy a balanced fund if there's no target-date fund: Select your risk level based on your time to retirement, not they way you "feel". If you have 40 years until retirement, select the most aggressive option and don't switch even if it goes down. Investments go down from time to time, but will rise over time.
3) Buy cheap: Select a fund based on its expense ratio, not its historical performance. No fund will shoot the lights out every time, and it's typically after a strong period of returns that it bottoms out. Fund expenses are like taxes: it's easier to make money when you're in a lower bracket.
4) Buy an index: Too smart for an index fund? Build your portfolio out of index funds in the S&P 500 (large cap), Russell 2000 (small cap), and Lehman Brothers Aggregate Bond Index. Small cap is aggressive, and should account for a smaller percentage of your allocation as you approach retirement. Indexes are cheap.
5) Don't neglect international funds: International funds are expensive, but you'll miss out on some solid returns if you don't put at least a percentage of your portfolio into them. Active managers will reallocate the portfolio to various countries depending on political and economic situations, as well as use currency hedging strategies to offset the effect of a volatile dollar. Actively managed is better in the international marketplace.
6) Seek help: Your employer will typically offer someone to help you select investments if you ask. You can also visit Morningstar - an independent resource on all things mutual fund related - for advice.
Next edition: What is a mutual fund, anyway?