Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.
Assets in equity mutual, exchange-traded and closed-end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor's 500 Index's 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc. The proportion of retirement funds in stocks fell about half of a percentage point, compared with an average rise of 8.2 percentage points in rallies since 1990.
The retreat shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse, which wiped out $11 trillion in U.S. equity value. That collapse was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value amid the slowest recovery from a recession since World War II. Individuals are withdrawing money as political leaders struggle to avert budget cuts that may throw the economy into a new slump.
"Our biggest liability in the stock market has been the total destruction to confidence," said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion.
The S&P 500 climbed 1.2 percent to 1,430.15 last week, extending the 2012 gain to 14 percent, led by financial stocks and consumer companies. The benchmark index from American equity has risen from a low of 676.53 on March 9, 2009, though it is still 8.8 percent below its record high on Oct. 9, 2007.
Much of the damage to investors is self-inflicted as U.S. growth improves and companies whose earnings are most tied to economic expansion reap the biggest rewards. Of the 500 companies in the benchmark index, 481 are higher now than they were in March 2009 or when they entered the gauge.
Individuals are selling into the rally, cutting the proportion of assets in stocks to 72 percent from 72.5 percent in 2009, according to 401(k) and IRA mutual fund data from the Washington-based Investment Company Institute compiled by Bloomberg. Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
The percentage of households owning stock mutual funds has also fallen, dropping every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997, according to the latest ICI annual mutual fund survey.
The technology bubble in the 1990s saw equity mutual funds expand twice as much as the S&P 500. Stocks' representation in 401(k) and individual retirement account funds rose to about 90 percent in 2000 from 77 percent in 1992.
Money has gone to the relative safety of fixed-income investments. Managers who specialize in corporate bonds and Treasuries have received nearly $1 trillion in fresh cash since March 2009, ICI data show.
Outflows from stocks muted gains as reduced demand kept companies from going public or expanding through mergers and acquisitions, according to Paul Zemsky, head of asset allocation for ING Investment Management.
"Imagine where we could be if we had had positive inflows," Zemsky said. "It would be very helpful to get those flows reversed and have that money come out of bonds and into stock funds."
Even investors who were rewarded by sticking with stocks have had to endure record daily price swings and three corrections of at least 9.9 percent. In August 2011, after S&P stripped the U.S. of its AAA credit rating, the Dow Jones industrial average alternated between losses and gains of 400 points or more on four consecutive days, the longest streak on record, data compiled by Bloomberg show. Daily swings in the S&P 500 averaged 1.74 percent in 2008, the most for any year since the Great Depression.
"We've had all of this crazy risk-on/risk-off day-to-day fluctuation based on headline stories," John Carey with Pioneer Investments in Boston said.
Individuals have also seen evidence that computerized trading is making stock markets less reliable. An equity rout temporarily sent the Dow down almost 1,000 points on May 6, 2010, causing investors to question the stability of market mechanics and the effectiveness of regulators.
Botched IPOs, such as that of Facebook Inc. earlier this year, led to concern about trading and exchange technology, while Knight Capital Group Inc. nearly went out of business in August after it bombarded U.S. equity exchanges with erroneous orders in the wake of improperly installed software that malfunctioned.
"Whether it's the flash crash, the low-growth economy, unemployment, uncertainty about jobs -- those things just don't engender any desire to risk money," Walter "Bucky" Hellwig, of BB&T Wealth Management in Birmingham, Ala., said. "Investors say: The stock market? I don't have a clue as to how it works anymore."