Risk and Return.  We have seen that over long periods of time, stock investments have tended to substantially outperform bond investments.  However, it is not at all uncommon to observe investors with long horizons holding entirely bonds.  Are such investors irrational?

Over a long period of time, stock investments tend to substantially outperform bond investments; it is uncommon to see investors owning long horizons holding entirely bonds. This is because stocks are risk and particular investors prefer risk averse stocks, the extra returns obtained from the investment does not attract them as compared to the extra risk they might incur. Particularly, some investors might not be informed about the relationship that exists between risk and return hence may not comprehend the choice they are undertaking. Similarly, in the short run, stock investments are risk and unpredictable.