The average investor tends to hold large amounts of cash when the markets are at a low and thus miss out on gains, JPMorgan's Goldberg said. The previous high of cash as a percentage of portfolios was in October 2002, right before the start of a five-year bull market.
Institutions Hold Tight
"Households had become so conservative that they were sitting on all this cash that should've been seeking out opportunity," he said. "To the extent that emotions drive decisions, they're going to get it wrong."
Brad Durham, managing director of research at EPFR Global in Cambridge, Massachusetts, said retail investors are exiting funds while institutions are modestly adding to their holdings. Retail investors pulled $26 billion from U.S. equity funds from May 1 to Aug. 10, while institutions added $689 million, he said.
"Institutions are using this period to change their exposures around and they're not selling as aggressively, while retail investors have just been fleeing," Durham said.
The return of the S&P 500 during the past 10 years has been about 3 percent including dividends. Investors have experienced "a far greater degree of volatility than one would expect for such meager returns," Greggory Warren, a Morningstar analyst, wrote in a June 29 research note.
Toll on Managers
"The problem is you don't really know what to do," said James Dean, 67, a salesman for an information-services company who lives in Panama City, Florida. "There's no rhyme or reason for the market to be doing what it's doing other then the mess our government has gotten us into."
The investor exodus is taking a toll on publicly traded fund companies. The S&P index of money managers and custody banks has fallen 15 percent since the May 2010 plunge, compared with the 5.8 percent increase by the S&P 500, a benchmark for the largest U.S. companies.
Janus Capital Group Inc., which is off 47 percent, led the drop. About 89 percent of the Denver-based company's assets under management is in stock funds. It has had eight straight quarters of net withdrawals totaling $21.6 billion.
Closely held American Funds and Fidelity Investments are among the big asset managers bearing the brunt of investor defections from U.S. stock funds, according to Morningstar. American, owned by Los Angeles-based Capital Group Cos., had an estimated $43 billion in redemptions this year through July, while Boston-based Fidelity lost $8.8 billion, Morningstar data show.