Are investors irrational or just cautious when it comes to the fundamental stock/bond asset allocation decision? It’s a topical question in light of MarketWatch’s Jonathan Burton article that reviews the case for “Why stocks will beat bonds over the next 20 years.” The basic outline is by now familiar: bonds have done well in recent years while stocks have performed poorly. For example, over the past five years, the stock market (Russell 3000) is flat while bonds (Barclays Aggregate Bond) are up an annualized 6.5% through the end of 2011 (for a summary of recent returns, see my latest update of the major asset classes). Assuming a dose of mean reversion, the outlook for equities is favorable and prospective returns for bonds look relatively mediocre if not negative.