Investing in a 401(k) plan or individual retirement account is the best way to accumulate the most money. In a 401(k), an employer often provides free money, called matching money.
Also invest in a 401(k) and traditional IRA because Uncle Sam doesn't tax the money until it's withdrawn. That allows your savings to grow faster than they would in a savings account or mutual fund that could be taxed.
You can open an IRA at a bank and invest it all in certificates of deposit, which are insured for at least $100,000 by the FDIC. CDs maturing in five years pay as much as 4.25 percent in interest.
If you have a 401(k), you can leave money that's invested in the mutual funds you have already selected. With new money from each paycheck, you could select a money market fund or stable value fund if you can't bear a loss, a bond fund if you can stomach a little more risk or a balanced fund for additional risk.
A balanced fund typically invests about 60 percent in stocks and 40 percent in bonds. Last year, such funds lost around 29 percent, while the benchmark U.S. stock index lost nearly 40 percent.
Another alternative in a 401(k) plan: a mutual fund with a date in its name. These funds hold stocks and bonds and are geared to get you ready for retirement. So a fund with 2020 in the name would be designed for someone retiring in 2020. The closer to retirement you are, the less risky the fund. If you plan to retire in 2020, but are nervous about the stock market, you could select a 2015 fund and be exposed to fewer stocks.
If you want a modest approach to entering the market: Let's say you have a mixture of stock and bond funds, but now you want to start preparing for a recovery by investing more in stocks.
You could go with a mutual fund or pick large, solid companies that pay dividends. Those dividends are like interest payments, although they aren't guaranteed.
Chicago financial planner Cicily Maton said she prefers exchange-traded funds in the current environment instead of mutual funds. An ETF is like a mutual fund but you can bail out in the middle of the day if the market is crashing and you are afraid you are losing too much money. With a typical mutual fund, you must wait until the end of the day, and can lose a lot of money in the meantime.