25 and 'scared stiff' of making an investing mistake

(Money magazine) -- I'm 25 and off to a good start saving for retirement. But I'm scared stiff about how to invest my Roth IRA because a poor decision could cost me hundreds of thousands of dollars by the time I retire. Any advice? Andy C., Des Moines, Iowa

Relax, there's no need to work yourself into a lather. Even though many pros like to make investing seem complicated -- probably so you'll hire them to manage your money -- it's really not all that difficult.

Sure, you'll make some mistakes. We all do. But as long as you follow a few key principles like keeping it simple, holding the line on costs, diversifying broadly and ignoring the jabber of pundits who advocate constant buying and selling, any flubs you make aren't likely to wreak mortal damage.

Take solace in the fact that you're already doing the single most important thing to assure a secure future: You're actually saving. Wall Street types may cringe when I say this, but contributing to a retirement account regularly throughout your career is more important than investing prowess for building wealth over the long term.

That said, since you're going to the trouble to put bucks aside in your Roth IRA, you might as well earn a decent return. Here are three ways you can do that, ranging from easy to easier to easiest, without getting obsessive-compulsive about it.

The easy way. Your aim as a long-term investor should be to build a diversified portfolio of stocks and bonds and then stick with it, except to rebalance every year or so.

You can create that stocks-bonds mix simply and effectively by investing in just three funds: a total stock market index fund, a total bond market index fund and a total international stock index fund, each of which you can find on our MONEY 70 list.

This three-fund combo will give you exposure to the entire U.S. stock market, virtually all publicly-traded foreign stocks and the full gamut of taxable investment-grade domestic bonds.

In short, you'll put together the building blocks for a well-balanced portfolio -- and you'll do it on the cheap. Your annual costs should come in below 0.25% a year, or less than a quarter of what the typical mutual fund charges.

As for how to divvy up your money among these three components, there's no "official" blend. But considering that you're young and have plenty of time to ride out market setbacks, you'll want to lean heavily toward stocks, which have the potential to generate the highest long-term gains.

So I'd recommend investing 70% of your money in the total stock market index fund, 20% in the total international stock index fund and 10% in a total bond index fund.

If you're the anxious type whose gut starts rumbling every time the stock market plummets, you can certainly dial back your stock holdings and boost your bond stake. But the tradeoff for more security is lower long-term returns.

The easier way. What could be more simple than investing in the trio of funds I've just recommended? Investing in two -- specifically, dropping the international stock fund and putting 90% of your money in the total stock market index fund and 10% in the total bond market fund.

If you go the two-fund route, your portfolio will be somewhat less diversified. But sticking to an all-USA portfolio -- whether it's over concerns about Europe's prospects or you're just uneasy about investing abroad -- isn't going to do you in. Your portfolio will just be a bit jumpier over the long run than it would be with a helping of foreign stocks, and it may earn a tad less.

Besides, once you become more comfortable with investing, you always have the option of devoting some assets to a total international stock fund later on.

The easiest way. If three funds is easy and two is easier, then one fund must be the easiest. But can a single fund possibly provide you with everything you need for a coherent investing strategy? Yes, provided it's a target-date retirement fund.

A target-date fund gives you a ready-made diverse mix of stocks and bonds that gradually becomes more conservative by automatically shifting assets to bonds as you age. So to take the easiest route, you simply invest in a target fund with a date that roughly corresponds to the year you'll likely retire -- the 2050 fund in your case -- and you're pretty much done. The fund will contain all the elements for a well-diversified investment portfolio.

Most mutual fund companies offer these funds, but just two fund firms' target-date portfolios made our MONEY 70 list: those of T. Rowe Price and Vanguard.

One caveat: Although virtually all fund companies' target funds are similar in concept, they don't all allocate their assets the same way. So check out the fund company's website to make sure you're comfortable with the way the fund invests now, and its investment strategy for when you get nearer to retirement.

So stop obsessing already about screwing up. After all, this isn't rocket science. As long as you keep saving, follow those key investing principles and adopt any of the three strategies I've outlined, you should do just fine.