If one was to look at the return of stocks vs. bonds over the period of 1980-2013, as reported by barbarafriedbergpersonalfinance.com we would see that stocks have clearly outperformed bonds by a simple average annual return of 11.17% for S&P 500 stocks vs. 8.42% for the Barclay’s U.S. Aggregate Bonds, a very significant and meaningful difference between the two investments classes. On the surface, this would imply quite obviously, that those that recommend any allocation other than 100% stocks to be foolish, as stock returns have clearly demonstrated their superiority over bond returns, and this holds true in virtually any extended time period.
The problem that is often missed between investment classes or investments in general, is that most investments unless they have a fixed return, have a volatility part to the equation, which must be taken into account. Additionally, past performance, as they say, is definitely no guarantee of future performance, as the go-go stocks of the 1960s are definitely not the go-go stocks of today's market. This means, taken together, that stock investments, especially in comparison to standard bond investments, are significantly more volatile, and this volatility, affects negatively the average return that many investors actually receive from stocks.
For instance, over the 1980-2013 periods, there were no instances of bonds declining more than 2.92% in a single year, and in fact, in only three years, did bonds even decline in their investment return. On the other hand, stocks declined in twice as many years as bonds, with also a period of time in which stocks declined for three consecutive years, as well as having declines in their worst years of -11.89%,
-22.10% and -37.00%. Again, to put it in perspective, stocks clearly outperformed bonds, despite having some gut-wrenching negative years; yet, it is those years, which actually determine for the average investor as to whether his investments did worst or better than the averages so indicate.
The thing about the stock market is that the cost of buying and selling an individual stock or index fund and so forth is relatively trivial, very liquid, and as easy to do, as the click of a button on your computer, or a phone call to your broker. Additionally, stock brokerages, while they make money in a lot of different ways, definitely make part of their income on your approvals or decisions, depending upon how they are structured and executed. For instance, buying or selling a security at the "market price" probably means that your order has been executed at a price that costs you a minute amount of real dollars, but that inefficiency adds up over time; brokers advise clients, of which this advice ostensibly is for the customer's benefit, but in actuality has a strong component of benefiting the brokerage and their bonus/commission incentives over yourself. Also, brokers like customers that trade, and the more that you trade the more that they appreciate you, because each trade is a commission, and hence a benefit to the brokerage bottom line.
If the stock market never did much of anything, or barely went up, or barely went down on a given day, there would be less trading, but in fact, TV financial programs are all about, urgency, panic, and "opportunity", all presented to you as a reason to trade. This means, also, that psychologically for many investors, when there is euphoria in the air, when times are good, you have a tendency to be a buyer, typically near the peak of a given security, and when times are bad, you are seller, often just before a bottom is made on a security.
The fact of the matter is the volatility of the stock market affects investors, in a manner that they will thereby make decisions based on the fear, unfounded or not, of potential financial ruin. This means, that despite the stellar returns of the stock market in the past, most people have not seen that same stellar return, and because past performance is no guarantee of the future, there isn't any guarantee that they ever will. This is why, diversification in investments is impressed upon investors, because diversity, such as bonds, and in particular investments that do well or as a countermove for "bear" stock markets helps to balance out returns, reducing panic, and the potential of devastating financial ruin of a lifetime of savings.