Question

1. We have seen that over long periods, stock investments have tended to substantially outperform bond investments. However, it is common to observe investors with long horizons holding portfolios composed entirely of bonds. Are such investors irrational?

2. Why might long term investors prefer bonds over stocks? Is one better than the other? Explain your position.

Answer 1

1. No these investors are not irrational,but these investors are highly risk averse and they do not want to take any kind of risk in the investment into asset portfolio so they want to stay invested and protect their principal by investing into the bond portfolio because they also want a uniform rate of income as Bond are generally paying with the interest income so they've also secured themselves with regular income as well as full protection to the payment of principal because as it does not guarantee any payment and redemption of original amount.

2. long-term investors are prefering bonds over stocks as they are sceptical about the performance of the economy in the long run and they also want to secure themselves with constant income as well as security of their principal and hence they do not want much volatility in their rate of return and hence they want to get exposed to bonds not the stocks.

it is according to the nature of investor that they are investing into bonds and stock and it is not about one having better return than other but it is also about one having higher risk than other so it is always dependent upon the level of risk along with the the rate of return so stock will have higher risk and higher return and Bonds will have lower risk and lower return.