Stocks have more than doubled since the financial crisis and are closing in on a five-year high, but many Main Street investors have been absent from the party - especially those with the least saved.
Those who missed much of the rally did so because they reduced equity exposure after the benchmark S&P 500 index plummeted 57 percent between late 2007 and March 2009, according to an analysis by Reuters of mutual fund flows and changes in assets held in retirement accounts. Investors with the smallest savings typically saw the lowest percentage recovery in returns.
And while some have returned to the stock market during the subsequent rally, plenty of small investors remain on the sidelines.
"This is the most uncelebrated bull market in history," said Tony Ferreira, managing director at Cogent Research, which provides research and consulting for large fund managers. "In the old days, people would be jumping on the bandwagon, but nobody's chasing equity performance this time. Many people are still scared to wade back into the water."
If the equity upswing continues, some economists fear it could leave middle class Americans financially unprepared for retirement and widen the growing income disparities between rich and poor, which the U.S. Census Bureau said grew sharply in 2011.
It could also complicate President Barack Obama's chances for re-election, with some voters not having enjoyed much of a wealth effect from the stock market's 3-1/2-year rally.
To be sure, plenty of Americans have seen the balances of their 401(k) retirement accounts bounce back since the financial crisis as inertia kept many from abandoning stocks when the market crashed.
But things are hardly like they were during the bull market in the 1990s, which turned many retail investors into addicts for the latest Internet stock offering.
According to figures from Cerulli Associates that are based on analysis of Federal Reserve data, those with less than $100,000 in investable assets on average had $17,975 at the end of 2011, down 9 percent from $19,732 at the end of 2007.
In contrast, those with $500,000 to $2 million saw a 7 percent uptick to $966,948 from $903,219.
The vast majority of U.S. households - 87 million of the almost 119 million in 2011 - have less than $100,000 in assets, according to the data.
Investment advisers say stock market plunges in 2000-2002 and 2008-2009, the housing bust, a weak economy and a steady stream of Wall Street scandals have helped sour people on stocks and push them toward the perceived safety of bonds and cash.
Typically when the market doubles after hitting bottom investors return, said Jeffrey Mortimer, director of Investment Strategy at BNY Mellon Wealth Management in Boston.
But not this time. "They're still not back, and they'll unfortunately miss a rally," he said.
Investors didn't dump all their stocks during the crisis, but fewer households now hold equities than a decade ago, according to the Investment Company Institute, a U.S. mutual fund trade organization.
"The vast majority of people have some equity holdings in their 401(k) plans," said Brian Reid, chief economist at the ICI, but fewer are willing to take above-average or substantial risk than they were in 2008, before the market plummeted.
After climbing to 53 percent in 2001, equity ownership in individual stocks, mutual funds, ETFs and variable annuities fell to 48.2 percent in 2008 and 46.4 percent in 2011.
In another sign of how many investors have missed out on the recovery, they have pulled $235 billion out of U.S.-domiciled equity mutual funds, considered a proxy for retail investors, since 2007, data from Thomson Reuters' Lipper service shows.
Of that amount, some $53 billion has come out since last October, the bottom of a two-month selloff sparked by crisis in Europe and the loss of the United States' top credit rating. During that stretch, the benchmark Standard & Poor's has gained 28 percent, the Dow industrials 24 percent.
For the broad investing public, "it's been five solid years of steady outflows from equities and inflows into bonds," said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co, which oversees $1.6 trillion in client assets. "Even 3-1/2 years into this bull market and the gains we've seen since June, it has not turned that psychology around."
KEEPING AHEAD OF INFLATION
Investors who left the market at the end of 2008 or early 2009, paid a high price.
Fidelity Investments found that individuals who had been investing for at least 12 consecutive years in their 401(k) plans but pulled out of equities in late 2008 or early 2009 had an average balance at the end of June 2012 of $167,000, compared with a $212,000 balance for those who didn't.
"The average investor tends to chase returns when things are going well and bolt when things are going poorly," says Drew Kanaly, CEO of Kanaly Trust Co in Houston.
To be fair, even advisers for the very wealthy - people with a few million dollars in assets - have lately been doing "a lot of hand-holding and education" for clients who were scarred by the 2008 crash, said Lori Heinel, head of investment services and chief investment strategist at Oppenheimer Funds.
"But some of these investors may just want to preserve capital. They don't necessarily have to see it grow," she said. "I'm more concerned about the average investor with a 401(K) balance that's less than $100,000."
Indeed, if average investors don't recover some appetite for risk, it could leave more Americans financially under prepared for retirement.
According to the Employee Benefit Research Institute, the median balance was $58,000 for workers 55-64 with a 401(k) retirement plan at the end of 2010. The median for all 401(k) participants that year was $17,686.
About 60 percent of workers and or their spouses had less than $25,000 in savings and investments excluding their homes and pensions, according to EBRI's 2012 Retirement Confidence Survey, which was released in May.
And it's not just baby boomers that are at risk.
A recent Cogent Research report found that risk aversion among all age groups has been on the rise since 2006, including Generation X and Y, who have lived through a number of market collapses.
But while bonds have provided solid returns in recent years, thanks to low inflation and the Federal Reserve efforts to hold down interest rates, advisers say a long-term strategy based on bonds and cash may be riskier than stocks.
Bank accounts and money market funds currently pay next to nothing and a 10-year bond is yielding little more than 1.6 percent.
"If you have a 401(K) or an IRA, you have to be invested in risk assets in order not to outlive your money," said Barry Ritholtz, director of equity research at Fusion IQ. "There's simply no way to get to retirement without some sort of participation in the market. Unless you have $10 million, and maybe even if you do, you have to outpace inflation."
Investors, though, seem to be in no hurry to climb the so-called wall of worry. Now, many fear gridlock in Congress after the election could trigger massive automatic spending cuts and tax increases, bringing on another recession in 2013.
The American Association of Individual Investors reported on Thursday that bullish sentiment - based on whether investors expect stock prices to rise over the next six months - declined in its latest weekly survey to 36.1 percent.
It has now been below the historical average of 39 percent for 25 out of the past 26 weeks, and many of those responding expressed frustration about the political uncertainty.
© 2016 Thomson/Reuters. All rights reserved.