It's important to match your investment strategy to the time horizon of your future cash needs. It may be appropriate to invest money that you don't need for several years in investments such as stock funds, that offer the potential for higher returns over time, but which tend to be more volatile, especially over the short term. But why risk money you might need in the near future, when a market downturn could lead you to sell your investments at unfavorable prices? Instead, you may want to keep that short-term money in more conservative investments, such as certificate of deposits (CDs), money market funds, or other cash equivalents, which are less likely to lose value, but tend to have lower returns and are less volatile.

To better understand the importance of your investment time horizon, let's look at the returns for various investments from 1926 to 2011. While the average annual return for stocks (represented by the Standard & Poor's 500 stock index) was 9.9 percent during that period, 12-month returns ranged from a positive 162.9 percent to a negative 67.6 percent, a range of 230.5 percentage points. But for 10-year periods, the range narrowed to 26.3 percentage points on an annualized basis.

Historically, the range of returns narrowed further for more conservative investments such as investment-grade bonds and cash equivalents, which saw much less variation, but lower average returns. Bond returns (represented by the Barclays Capital U.S. Aggregate Bond index) averaged 5.2 percent per year during the period from 1926 to 2011 and 12-month returns ranged from a high of 35.2 percent to a low of negative 12.5 percent, a range of 47.7 percentage points. The range fell to 14.8 percentage points when 10-year period returns were annualized. For cash equivalents the average annual return was 3.6 percent, with a 12-month high of 15.2 percent and low of 0 percent. Over 10-year periods, the range dropped from 15.2 to 9.1 percentage points when annualized.

Your investment time horizon is an important component of your investment decisions. A portfolio comprised primarily of stocks could yield higher returns over time, but can also expose your investments to higher volatility. With a longer investment time horizon, you may be willing to accept that volatility. Investing primarily in investment-grade bonds or cash equivalents has historically generally reduced volatility, but can also lower returns. With a shorter investment time horizon, it may be a trade-off you would be willing to make.

You will need to determine the amount of risk you are comfortable taking considering your investment objectives, overall assets, and your time horizon for withdrawing money, along with other factors. But you should also consider increasing your contribution to your employer-sponsored retirement plan. See the Market View Chart, "Save More or Add Risk?" for more about how adjusting your investment allocation or boosting your contributions can affect your retirement savings. Also see "How Do I Change My Contribution Amount?" for information on how to change your contributions.