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While the evidence suggests that over long periods of time that stocks will outperform bonds, individuals...

While the evidence suggests that over long periods of time that stocks will outperform bonds, individuals with a long-term investment horizon may still choose to invest in bonds. Is this rational behavior? Why or why not? (Please use specific examples of bonds and stocks to support your response) 400-500 words

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Answer #1

Individuals who choose to invest in bonds over the long term may do so due to the following reasons:

  1. Avoid risk of obsolescence : Due to changes in technology, investors may prefer to invest in bonds rather than in equity. By investing in bonds, they stand a better chance to get back their money in case the company closes down than if they invest in equity.
  2. Lack of knowledge of market : Many investors are not aware of the stock market. In developing nations, less than 1% of the population invests in the stock market.
  3. Age factor : Older people prefer to invest in bonds / bank deposits since they cannot go through volatility of returns on their life savings., if they lose money in the stock market, they would have no other source of income and it is very difficult for them to absorb or digest losses.
  4. Bonds are an insurance as an investment category against recessionary periods. They also protect the investor from deflation and also are a prudent alternative to wrong decisions that investors can make in the stock market.
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