At 26 years old, you need to be primarily invested in stocks or indexed mutual funds. You have roughly 40 years until retirement, which means you have 40 years for your money to grow. If you put that money into a relatively safe investment vehicle like bonds, CDs or cash, you're wasting your time and you'll never reach your retirement goals.

Over the long term, stocks are reliable and relatively safe investments. With 40 years to invest, you'll see a lot of fluctuations, but the overall trend will continue to rise over time. Right now is the time in your life where risk is ok, because you have a long time to recover from market fluctuations. Way too many people in their 20's and 30's are investing too conservatively to meet their retirement needs because they've seen 2 recent market crashes in their lifespan without seeing the longer term stock returns over several decades. To the average 26 year old, the "annualized long term stock return of 10%" is just a myth. But realistically, stocks are where you need to be until you start get older and approaching retirement.

Stocks are one of the few investments that will return enough to build a nest egg large enough to retire in over the course of your career. The lower risk, lower return investments are not designed to build a retirement portfolio on. They're designed to provide stability in your portfolio as you get closer to retirement. When you're 60, you can't afford to take a 30% hit in your retirement account just because the market crashes. When you're 35, a 30% hit is no big deal, because you have another 30 years or so until retirement. By the time you reach retirement age, the market crashes and dips are just a small blip on a very long graph.

I would recommend picking up a few books on stock market fundamentals and learn what exactly you're investing in. Most people (especially young people) think the stock market is nothing more than ticker symbols that change price on the whims of some ominous group of Wall Street Investors in a NYC office. But they're not. Stocks are small shares of ownership in real companies that make real profits, and your ownership share has an inherent value that grows as the companies do. When you start thinking of stocks not as a symbol, but instead as a share of ownership, it's a lot easier to swallow the idea of stocks as a long term investment vehicle.

Where do you think McDonald's is going to be in 40 years, when you're ready to retire? What about 3M? Or Exxon? Do you think they'll still be around? Still be profitable? Would you like to own a share of those profits 40 years from now?

ETA: The best thing to do is sit down right now and set a goal for your retirement. What type of income do you want to have when you retire? Pick a number, say $50k per year, and adjust it for inflation. (The US long term average is about 3%, but you can tweak it how you want depending on how pessimistic/optimistic you are). So let's say you come up with an inflation adjusted income of $160,000 at retirement, which will give you the equivalent of a $50k income today. Your goal should be to generate $160k+ from your retirement savings.

Generally, you can withdraw about 4% of your retirement savings each year, and the remaining balance will continue to grow fast enough to maintain your principle. So if you're drawing $160k per year, it means you need about $4 million at retirement to reach that goal. Maybe you can live with less, maybe you need more. That's really up to you.

But here's the mind-blowing part: Using an average long term return of 8%, you need to invest about $1,250 per month to reach that goal, if you spend 40 years to get there. If you wait until you're 35, and you only have 30 years to invest, you need to invest nearly $3,000 per month, just to get the same amount of money at age 65. And what if you started when you were 18 instead of 26? The extra 8 years of investing means that you can invest 1/2 as much money each month, and still come up with $4 million at retirement.

The power of compound interest cannot be overstated. Starting early when you have a lot of years to invest makes all the difference in the world.