Question

My Brother, and my Grandmother.

My grandmother was very risk averse, so she invested in a portfolio of bonds, believing that they were low risk, and willing to accept a lower return as a result.

My brother was able to tolerate more risk, and wanted a higher return. So, he invested in stocks to get a higher return, willing to accept the additional risk.

I say, They were BOTH wrong!

Why? What common error were they both making?

Answer 1

They were both making a common error that investing your whole savings only in one of the fund (either bonds or stocks) will result in more risk and less returns than what can be achieved by:
For grandmother: With a portfolio of bonds and stocks which are negatively correlated - It will result in less risk than the only bond portfolio.
For brother: With an efficient portfolio of bonds and stocks which are positively correlated - It will result in a portfolio with more returns (or atleast same) at somewhat lower risk.

Please do rate me and mention doubts, if any, in the comments section.