If your a pension fund, a retiree, or anyone else who will need to spend money in the short-term, it often makes sense to forgo some long-term returns for short-term stability.
You're correct that past returns are no guarantee of future performance; however, there is 100 years of history (not to mention economic theory) that supports the assumption that equities will outperform current interest rates over the long run.
I guess what I'm trying to get at is, is there a way I can estimate the probability that equities will return less than 2.5% over the next 30 years, given the information that the 30-year bond rate is 2.5% and the expected return on stocks is, say, 10%, and the market is efficient and some people buy bonds anyway?
Can you estimate the probability of your scenario? Sure, you could use the historical volatility of equity returns to calculate the chance of that happening. However, unless you add in other factors that you think could realistically hurt future equity returns, I think you'll find that probability to be very small.
Presumably, there's a tradeoff between risk and interest rate, right? If you buy national bonds at 1.5%, you're accepting very low growth presumably in exchange for near-zero risk. If you park your money in a bank account earning 2%, you're getting a bit more, presumably at some higher risk.
If you're earning 10% or 15% on the stock market through a balanced profile of index funds, doesn't that suggest that there must fundamentally be some significantly higher risk associated with that? How much exactly? Otherwise I assume nobody would be buying bonds at the available interest rates.
Why do I see so many people these days giving financial advice that the only responsible thing to do with your money is invest it in the market? Undoubtedly that's been great advice over the past 10 years, but past returns are no guarantee of future performance, right?
Is it mainly post-2008 that it became common sense that the average person should park their savings in the market?
What does the market think the actual risk level of an index fund is?
Or else why does anyone buy 10-year bonds?
I'm really curious to hear thoughtful responses about this.