For new and inexperienced investors, getting started is often the biggest challenge. You’re faced with decisions about where to invest your money and how to manage your portfolio, all of which can seem pretty complicated.

It doesn’t need to be. You can keep investing simple and convenient by opting for an index fund portfolio. With indexing, your funds' returns automatically track a market benchmark, such as the S&P 500.

This strategy is also likely to give you better performance than active management. Nearly 90 percent of U.S. stock index funds earned higher returns than their actively managed peers over the 15 years ending in 2018, according to S&P Dow Jones Indices, an index researcher and provider.

More on Investing

That performance edge is largely due to the lower costs of indexing, which allow you to keep more of your return. That advantage is growing thanks to a price war among fund firms. Actively managed domestic stock funds recently charged an average 0.73 percent vs. just 0.11 percent for index funds, according to Morningstar, the investment research firm.  

For those investing through an employer-sponsored retirement plan, such as a 401(k), your fund menu may be too limited to build an all-index-fund portfolio. If that’s the case, consider saving in one low-cost index fund in your 401(k), says Rich Romey, a financial planner and founder of ETF Portfolio Partners in Leawood, Kansas. (Many plans offer at least one. For more on low-cost 401(k) investing, see this article.)

Then use additional savings to fill out your asset mix with index funds in an IRA. That way, you’ll still get your full employer match and create the asset mix you want at a lower cost.

The good news is that building this portfolio is easier than you may think. Many low-cost index funds have very small initial investment requirements (some have no minimums). And the sooner you begin investing, the more time you’ll have for the benefits to compound. Here are three steps to follow.

Choose Your Index Funds

You don’t need a broad array of funds to build a well-diversified index portfolio. “The classic solution is the three-fund portfolio,” says William Bernstein, an investment adviser and author of “The Investor’s Manifesto.”  

This lineup includes a U.S. total stock index fund that mirrors the broad U.S. stock market, with both large and small stocks. You will also want a total international stock index fund, which tracks both developed and emerging markets. To round out the group, opt for a U.S. total fixed-income index fund that holds government and corporate bonds.

Many fund companies offer versions of these basic index funds, both as traditional mutual funds and exchange-traded funds. But not all charge rock-bottom fees. So pay attention to costs as you begin to pick and choose funds. For broad index mutual funds, fees of 0.20 percent or less are reasonable. Fidelity recently launched two index funds that charge zero expenses.

Still, as long as your costs are low, you don’t need to agonize over a difference in fees that's a few basis points, because a further reduction won’t have much impact. “Going from 0.2 percent to 0.1 percent isn’t such a big deal,” says Rick Ferri, an investment adviser and head of Ferri Investment Solutions.  

Select the Right Asset Mix

Once you’ve identified your index fund lineup, your next step is to decide how much to invest in each of your funds. This asset allocation decision—especially the overall ratio of stocks to bonds—will have a big impact on the risk and return of your portfolio.

To find the right asset mix, take a look at a target-date fund allocation as a starting point. Pick one geared to your desired retirement year. “Since these funds use professionally managed asset allocations for different life stages, they can be a great starting point” for determining your best mix of stock vs. bond index funds, says Christine Benz, director of personal finance at Morningstar.

For example, a 30-year-old who plans to retire at 65 might invest 90 percent in stocks and 10 percent in bonds, which is the asset mix held by Vanguard Target Retirement 2055 (VFFVX). A 50-year-old investor might prefer the tamer mix held by Vanguard Target Retirement 2035 (VTTHX), which keeps 77 percent in stocks and 23 percent in bonds.

Still, you should customize the allocations to fit your financial circumstances. The goal is to have a portfolio that will let you sleep at night and avoid panic selling during a market rout. During the 2007-2009 market meltdown, for example, stocks plunged more than 50 percent. If you saw that happening today, “would you sit patiently and wait till it comes back?” Romey asks. If not, you may be better off with a more conservative stock allocation, even if you’re in your 20s.

Staying on Track

Once you have your portfolio in place, you will need to rebalance periodically. This simply means moving funds back into alignment with your original asset allocation, because market movements will knock the percentages out of line.

Say, after a year, your 60 percent allocation in U.S. stocks has grown to 67 percent. Meanwhile, your 20 percent international stock allocation and your 20 percent bond stake now account for 15 percent and 18 percent, respectively. To rebalance, you can sell 7 percent of your U.S. stock fund and shift that money into the other two funds to restore your target allocations.

For most investors, you will only need to rebalance occasionally—perhaps once a year, or when your allocation moves out of target range by 10 percent or more. More frequent rebalancing generally doesn't improve returns, research shows. But be sure to review your portfolio at least once a year to see if you need to rebalance, says Benz.

As your savings grow and your life circumstances change, you will probably want to tweak your asset mix by adding new funds for additional diversification or by combining your portfolio with a spouse’s holdings. Still, “by using index funds as your building blocks," Benz says, "it will be easier to make those adjustments as the years go by.”