Financial crisis ushers in 'The Age of Safety' for investors

NEW YORK -- Americans' risk-taking DNA code has been short-circuited.

Investing used to be about taking risk to make money. Then came the financial crisis four years ago and the Great Recession. Now it's more about playing it safe — and not losing the money you already have. The "risk-off" trade, or dialing down risk in a major way, is the new "in thing."

Risk aversion is at unprecedented levels. Cash, which guarantees a return of 0%, is one of the new must-have investments. In contrast, investing in stocks — despite the fact that the market has doubled in value since March 2009, is trading at four-year highs and is up 12% this year — has fallen out of favor.

Welcome to The Age of Safety.

A psychological shift has taken place in the minds of investors. Fear has replaced greed as the overriding emotion driving investment decisions.

"You can go all the way back to the early 2000s, when the Nasdaq technology stock bubble burst. Then came 9/11. Since then, you have had the creeping realization that it is a more dangerous world," says Peter Crane, president of Crane Data, a firm that tracks money market cash flows. "Then the 2008 financial crisis drove home the point that it is a much more dangerous financial world. Both businesses and individuals realize they need larger cash war chests."

As a result, he says, cash is viewed as the only true safe harbor.

There's no shortage of statistics that scream "safety":

•Cash hoarding. A record $9.43 trillion — enough cash to buy 120 of the biggest companies in the Standard & Poor's 500-stock index — is now sitting in money market mutual funds, bank savings accounts and CDs, according to Crane Data.

But all that cash isn't making anyone rich.

"The rate of return is effectively zero," Crane says. "How much of the $9 trillion is scared money is arguable. But the overall numbers are gigantic."

Getting no return, however, has not stopped Bruce Tepper, 67, and his 66-year-old wife, Nancy, from squirreling away excess cash in a money market checking account. "It's earning next to nothing, but the money is accessible," he says.

•Rich retrenching. Even the richest of the rich, the One Percent, are thinking defense first, according to "The 2012 Survey of Affluence and Wealth in America" from American Express Publishing and Harrison Group. One Percenters put 56% of their free cash into savings and money market accounts last quarter, up from 24% in 2007. In contrast, they are investing only 44% in financial markets, down from 76% five years ago.

"Their speculative impulse is way, way down," says Harrison Group Vice Chairman Jim Taylor, adding that the mega-rich now equate the stock market with "real risk."

•Mom and pop selling.Main Street investors have been lightening up on stocks since the financial crisis. In the four years ending 2011, individual investors yanked more than $395 billion out of stock mutual funds, according to the Investment Company Institute. In contrast, more than $775 billion has been funneled into the perceived safety of mutual funds that invest in bonds. (Mutual funds that invest solely in U.S. stocks have seen outflows six straight years.) That trend of selling stock funds and buying bond funds has continued in 2012.

One Wall Street pro blames the exodus from stocks on the boom-bust, boom-bust roller-coaster ride investors have been on in recent years.