Story Highlights

Stocks usually outperform money funds and bonds in long run Index funds usually beat managed funds You get your biggest boost from saving more

If you spend any time perusing the Internet, you’ll see that there’s a whole industry devoted to warning you about the dangers of everything. Five caterpillars that nest in your ears! Three fabric softeners that will kill your family! How to tell if your dog is driving your car while you sleep!

But every once in a while — not often, mind you — things that seem incredibly complex and dangerous are, indeed, incredibly simple. Investing in your 401(k) is one of those, provided you follow these three rules. Otherwise, you could spend your life in poverty and covered with sores.

The first thing to know is this: Over most long periods of time, even if you start investing at the worst possible period, stocks have given you better returns than safer types of investments, such as bonds or money market funds.

We’re talking about portfolios of stocks, not individual ones, which have far greater risks than a group of stocks. Specifically, we’re talking about the kinds of mutual funds you might find in a company 401(k) plan, because that’s how most people save for the long term, adding a set amount to their funds every paycheck.

Suppose you had invested $100 a month for 10 years into the Vanguard 500 Index fund, which tracks the Standard and Poor’s 500-stock index. As of the end of November, you’d have $19,587, according to Lipper, which tracks the funds. Of that, $12,000 of that would have been the money you’d invested, and $7,587 would have been gains.

Your results if you’d invested the same amount for the same time in:

• The average money market fund: $12,589

• The average U.S. government bond fund: $14,607

All performance depends on the time you begin and end, and there have been a few losing 10-year periods, but they have been remarkably few.

But let’s say you were a truly snakebit investor, and started investing on Sept. 30, 2007 — just before the 2007-2009 bear market. As of the end of November, you’d have $11,707 in your account, having invested $7,400 of your own money — a $4,307 profit.

Your results if you’d invested the same amount for the same time in:

• The average money fund: $7,431 — a $31 profit.

• The average U.S. government bond fund: $8,158 — a $758 profit.

But let’s say you have really, really bad luck, and started investing in March 2000, just as the 2000-2002 bear market hit. You then got smacked by the 2007-2009 bear market. By November of this year, you’d have $28,801 in your account, having shoveled in $16,500 of your own money, for a $12,301 profit. Your results from other types of investments:

• The average money fund: $18,001, a gain of $1,501.

• The average U.S. government bond fund: $22,067, an increase of $5,567.

Naturally, these results were all made comfortably after a four-year bull market, and nothing that has happened in the past must happen in the future. Nevertheless, if you have a long time horizon, stocks have been a reliable way to get better returns from what you’d get from cash — represented by money funds here — or bonds, represented by U.S. government bond funds. So that’s the first rule.

The second rule: Your company is probably lousy at picking funds, so you should stick with an index fund.

Most companies offer a selection of very large funds with extremely good track records. In fact, that’s why those funds have fared so well. Few companies like to offer a fund with a stinky record. It’s human nature.

But if we look at the 25 largest stock funds — many of which you probably have in your 401(k) — you’ll see that only 23 have 10-year records, and of those, only six have beaten the Vanguard 500 Index fund for systematic investors. (They are: Vanguard Total Stock Market Index (VTSMX), American Funds Growth (AGTHX), Fidelity Contrafund (FCNTX), American Funds Fundamental Investors (ANCFX), American Funds New Perspective (ANWPX) and Dodge & Cox Stock (DODGX).)

The record is about as dismal if you look at the largest funds 10 years ago, which are what you probably would have been offered when you started investing your $100 a month. The Vanguard 500 fund ranks 11th out of 25. The worst performer, Fidelity Growth and Income, would have returned $2,406 less than the Vanguard 500 fund.

Index funds don’t have managers, so they aren’t subject to hubris — the godlike feeling people get when they have made good calls in a bull market. This feeling is usually followed by humiliation, depression and the desire to shun press calls. More important, index funds have lower annual expenses than actively managed funds, allowing shareholders to keep more of their gains.

The third rule: The only thing you can really count on in this life is the amount you save. No amount of argument will get stocks, gold or interest rates to rise when you want them to. If you want a sure-fire way to increase your 401(k) balance, then increase the amount you sock away.

In 2014, you can save up to $17,500 in your 401(k) plan, and if you’re 50 or older, you can put away another $5,500. Because your money is taken out before taxes, bumping up your monthly contributions might not be as painful as you think. Let’s say you’re single and gross $50,000 a year. You’re in the 25% tax bracket. Conveniently, you live in Texas, so we don’t have to mess with state taxes.

Currently, you contribute 4% of your income to your 401(k), or $167 a month. Because you’re contributing pretax money, however, your monthly pay only falls by $125 a month. If you bump up your contribution rate to 5%, you’ll increase your savings to $208 a month, but your monthly pay will only fall by $156. You can probably figure out how to save that much a month.

If you don’t follow these rules, you may not end up living like a wild man in a cave or renting yourself out as furniture to famous billionaires. But you will have more money in your retirement account.