I contribute 15% of pay to my 401(k) plan, but I don't really know much about investing. So I just picked the funds that looked the best to me. Any suggestions for how I can do a better job investing for retirement? --M.A., Mississippi

You're not alone in being unsure about how to invest your 401(k) money. A survey of retirement plan participants last year found that only 28% said they were very familiar with the investment options in their plan.

Given that lack of knowledge it's hardly surprising that people resort to less-than-ideal ways of choosing investments. For example, nearly four in ten 401(k) investors surveyed said they considered a fund's past performance the most important factor when making investment decisions for their retirement plan. But relying on a fund's track record can often be a recipe for jumping into hot investments that may be ready to flame out.

Fortunately, it's not that difficult to create a simple-but-smart investing strategy that can grow your 401(k)'s balance during your career, and also increase the chances that it will support you throughout retirement. You can do it by following these three steps:

1. Start by setting an asset mix, not picking funds. Given how much investment pros and the financial press focus on which investments are sizzling and which are fizzling, you can easily get the impression that to be a successful investor you've got to zero in on funds that will top the performance charts over the next year or so. But aside from being extremely difficult to pull off, such a strategy can leave you with a lopsided portfolio dangerously weighted to just a few sectors of the market.

A better approach: create a diversified mix of stock and bond funds that makes sense given your tolerance for risk and how long you expect to keep your money invested. The younger you are, the more you should usually tilt that mix toward stock funds, as equities generally have a higher probability of delivering the lofty returns you'll need to build an adequate nest egg. As you get older, however, you'll want to take greater care in protecting your savings from severe market downturns, which typically means moving more of your savings into bond funds to dampen your portfolio's ups and downs.

One way to arrive at a suitable stocks-bonds allocation is to check out Vanguard's asset allocation-risk tolerance tool. The tool will recommend a mix of stocks and bonds that jibes with your appetite for risk. It will also show you how that stocks-bonds mix has performed over the long-term and in good and bad markets.

Calculator: Fix your asset allocation

2. Look for diversified funds with low costs, not lofty past returns. Once you've decided how much of your savings you want to devote to stocks and how much to bonds, you can begin thinking about which stock funds and which bond funds on your plan's investment menu are right for you.

Here, you have two aims, the first of which is to make sure that the funds you choose give you broad exposure to the stock and bond markets. In the case of equities, that means your stock stake should include large- and small-company shares, value and growth stocks and shares of companies representing all industries and sectors of the market. (You may also want to devote a small portion of your stock stake -- say, 10% to 20% -- to foreign stock funds, although it's not as if you would be relegating your nest egg to sub-par growth if you decide to limit yourself to domestic funds.)

As for bonds, you want to insure that your holdings include high-quality government and corporate bonds with a variety of maturities (although the average maturity of your bond holdings should be in the short- to intermediate-term range (say, two to seven years).

Your second goal in picking funds is to home in on those with low fees. There's no guarantee that doing so will translate to higher returns. But research on fund fees shows that funds with low annual expenses tend to outperform their higher-cost counterparts, which means a greater share of whatever returns the financial markets deliver goes to you. Giving away as little return as possible to costs is especially important today since many investment pros are forecasting lower-than-average returns for both stocks and bonds in the years ahead.

The easiest way to get this combination of broad diversified exposure to the stock and bond markets at a low cost is to focus on index funds. For example, investing in a U.S. total stock market index fund and a total U.S. bond market index fund will give you virtually the entire U.S. stock and taxable bond markets in two funds typically at a cost well below 0.5%.

Related: The basics of retirement investing

If your 401(k) doesn't have such funds, you can look for other ways of getting this exposure -- say, by combining an S&P 500 index fund or other broadly diversified large-company stock fund that has low expenses with a small-cap index fund or other broadly diversified low-fee small-cap fund. In lieu of index funds, many 401(k)s may offer low-cost institutional or commingled stock and bond portfolios that track or come close to tracking the broad market.

Of course, you'll have to work with the choices available in your plan. But to the extent possible you want to end up with a portfolio of funds that give you broadly diversified access to the stock and bond markets at as low a cost as possible, ideally 0.5% a year or less.

3. Resist the temptation to "improve" performance. This may sound like heresy. After all, who wouldn't want better results? Problem is, many decisions made in the name of boosting returns or increasing diversification are actually futile attempts to outguess the markets or to throw money into the Next Big Thing being touted by Wall Street's marketing machine. So ignore the noise and the marketing buzz and stick with your stocks-bonds mix except to rebalance periodically to restore your portfolio to the appropriate proportions (which may involve shifting more toward bonds as you age).

If building your own portfolio is just too much for you, there are other options. Most 401(k) plans offer target-date retirement funds, which provide a pre-set mix of stocks and bonds that becomes more conservative as you age, and many offer services that will create and manage a portfolio for an annual fee. Or you can always consult an adviser for help. But if you're inclined to invest on your own, following the three steps I've outlined above will certainly give you a much better shot at success than just picking the funds that look best.

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