Invest in stocks? Small players still smarting

NEW YORK -- On Main Street these days, investing in the stock market is about as popular as watching a scary movie on a 12-inch black-and-white TV.

Wall Street's long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn't as sexy as it used to be. Since the 2008-09 financial crisis, the buy-now mentality has been replaced by a get-me-out, wait-and-see, bonds-are-safer line of thinking.

Stocks remain out of fashion even though the stock market has risen more than 100% since the bear market ended three years ago. It's up 25% since October and 9% this year.

Retail investors have yanked more than $260 billion out of mutual funds that invest in U.S. stocks since the end of 2008, says the Investment Company Institute, a fund trade group. In contrast, they have funneled more than $800 billion into funds that invest in less-volatile bonds.

Michael Hoffman, a 66-year-old psychotherapist from Dana Point, Calif., has none of his money tied up in stocks. "I'm never going back in," he says.

Bart Ruff, 48, a brand manager from Lederach, Pa., isn't putting any new money into the market. "The roller coaster of the last five years," he says, "has made me more conservative."

Arlene Armstrong, a 61-year-old fundraiser from Columbus, Ohio, and her husband, Mike, 62, have slashed the share of stocks in their portfolio to 14% from 60%. "We are considering buying more stocks, but we're still recovering from the trauma we experienced when the market tanked," she says.

What made small investors like the Armstrongs so leery of stocks was the most severe market decline since the Great Depression. They remain on the defensive even though U.S. stocks have doubled since March 2009 and a Who's Who of finance — including billionaire Warren Buffett— insist stocks are a better investment now than cash, bonds, gold and other assets perceived as safer.

Investors' chronic mistrust of stocks is reigniting fears that an entire generation is unlikely to stash large chunks of cash in the increasingly unpredictable market as they did in the past.

"Investors have suffered a traumatic shock that has caused severe psychological damage and made them more risk-averse," says Carmine Grigoli, chief investment strategist at Mizuho Securities USA. Current worries, such as the USA's swelling deficit, Europe's unresolved debt crisis and slowing growth in China, have done little to ease their anxiety, he adds.

Evidence of a decrease in risk-taking is borne out in buying patterns of the nation's 90 million mutual fund investors. Mutual funds are the main investment vehicle used by individuals to save for long-term needs such as retirement and college. Main Street investors have continued to withdraw money from U.S. stock funds for 10 straight weeks, totaling an estimated net outflow of $29.4 billion, ICI data show.

A "bunker mentality" pervades the psyche of many investors burned by not only the 2008 financial crisis, but also the 2000 technology stock bust, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.

"The scar tissue is still so fresh," says Luschini. "If individual investors are not pulling out of stocks outright, they continue to reduce risk by lightening up."