A Suze Orman exclusive

Okay, I know that even a simple step-by-step explanation of mutual funds is not going to cut it with some of you. You know you need to be investing in your 401(k) and IRA, but you so don’t have the patience to do a little homework and figure out the best options. Fine. Here’s the cut-to-the-chase advice: Invest in a broad-based stock market index fund. And then fuggetaboudit.

Instead of having to bet on the talent of a professional money manager to pick the right stocks, an index fund is a bet on the market. Period. When the market goes up, your index fund will go up. When the market goes down, your index fund will go down. Plain and simple. So what’s so great about an index fund? Well, for starters, consider that over the long term very few mutual fund managers who actively buy and sell stocks manage to beat the most popular broad-based index, the S&P 500, which holds 500 blue-chip U.S. stocks. So over the years simply sticking with an index means you have an excellent chance of doing better than the typical managed stock fund.

And the long-term average annual return of an index like the S&P 500 is about 10 percent. If you simply put $4,000 a year in a Roth IRA invested in a stock index fund that averages a 10 percent return over the next 30 years, you will end up with $723,000. Even if that return drops to an average of 8 percent over the next few decades, you would still finish with a tidy nest egg of nearly $500,000.

Right now, Vanguard and Fidelity are in a pitched battle for your index fund investments. The whole index game comes down to who charges the lowest annual “expense ratio,” which is the ongoing fee all investors fork over to the fund each year. (More details on expense ratios in a minute.) Vanguard’s index funds, which require a $3,000 minimum investment ($1,000 for an IRA), charge as little as 0.18 percent, which is amazingly cheap when you consider the average actively managed stock fund has an expense ratio of more than 1.5 percent. But Fidelity’s Spartan index funds have recently dropped their expense ratios to an even better 0.10 percent, though you need $10,000 to get started, even for an IRA.

If you truly want a one-fund solution, I would recommend investing in a “total” stock market index or an “extended” market index. These funds own an even wider array of stocks than the S&P 500, which is focused on large established companies. The broader total and extended market indexes also hold mid-size and small stocks; it’s a great way to get exposure to all strata of the U.S. market.

Now I know some of you may not have index funds in your company 401(k)s. You and your colleagues should bug your HR department to get index funds added. But in the meantime, let’s focus on some simple solutions for you. Look for a fund in the plan that says it invests in “large-cap” stocks. If the plan offers both a large-cap “growth” and a large-cap “value” fund, I’d recommend splitting your money between the two. I’ll explain growth and value funds in more detail below, but I don’t want to get bogged down here since I promised this was the Simple Solution section of the article.

Another 401(k) option to look out for what are variously called “life-strategy,” “life-cycle,” or “target” retirement funds. Many 401(k)s offer these funds for participants who don’t want to spend the time to build a portfolio of multiple funds. With these offerings, you choose a fund that is targeted to your current age, and the portfolio you get is geared to your investment time horizon. If you are in your 20s or 30s, your fund is going to be mostly invested in stocks. If you are in your 50s, your fund will have a more conservative bent that includes a higher stake in bonds. To be honest, I am not the biggest fan of these funds because I really don’t like bonds that are held in a fund (full explanation below); but, that said, I would certainly want you to invest in one of these funds rather than not invest in your 401(k) at all.