Investors don't feel like taking chances with stocks, spending

The way Wendy Hunt spends, saves and invests her money is much different today than it was before the financial crisis wreaked havoc on her personal finances. The economic fallout caused by two pay cuts at her old job, carrying two mortgages for five years and watching the value of her portfolio get sliced in half has resulted in a "permanent change" in her attitude toward money, admits Cincinnati-based Hunt, 36, who landed a new job as an advertising director earlier this month.

Hunt's new financial fitness routine? Spend less. Save more. Invest more conservatively.

"If I can save money, I will," Hunt says. "I value money more than I did before."

It's what economists are calling the "New Normal," a more frugal financial world in which investment risk will be dialed back, savings will be ramped up and stockpiling money in the bank will re-emerge as a legitimate place to park cash as it was following the Great Depression.

Like millions of Americans hurt by the recession and falling stock and home values, Hunt has embraced frugality. In an effort "not to burn through money the way we used to," and save more for retirement and her kids' educations, Hunt is hunting more for bargains. She now shops for dry goods such as cereal, risotto, salsa and muffin mix at Target, where she saves up to $40 a week buying the off-price retailer's private-label brand. She has also cut back her weekly "date nights" with husband Brian, 37, to once a month.

And even though her portfolio has earned back most of the losses it suffered during the downturn, she's also taking a less risky approach to investing. The new financial adviser she hired to help sort out her finances persuaded her to boost her cash holdings to roughly 30% from 5% and slash her stock exposure in search of more consistent returns.

"I will not be as aggressive an investor as I used to be," Hunt says. "I will always strive to have more cash — the one secure security — in the bank ," adds Hunt, a mom with two daughters, Parker, 1, and Presley, 3.

All this angst comes despite an almost 50% rebound for the Dow Jones industrials since the March low and signs that the economy is getting healthy.

After nearly two decades of Americans bingeing on cheap money, living beyond their means and gunning for outsized market returns, today it's all about prudence, security and having cash on hand when things go wrong.

"The new frugality is a secular, not just cyclical, theme," says David Rosenberg, chief economist at Gluskin Sheff. "U.S. consumers are cutting back, and where they are not cutting back, they are scaling back," Rosenberg noted in a recent report.

Many economists fear that penny-pinching consumers will slow the economic recovery and profit rebound of U.S. companies.

Investors spooked by the near collapse of the financial system are also less willing to risk money in stocks, preferring safer investments such as certificates of deposit and money market mutual funds, says Robert Cohen, a New Jersey-based financial planner at Financial Strategies & Wealth Management.

There was $1.21 trillion in CDs at the end of August, the Federal Reserve says, down from $1.38 trillion at the start of the year, but about the same as September 2007, when the collapse of Lehman Bros. intensified the financial crisis. Another $3.48 trillion is parked in money market mutual funds, down from $3.84 trillion at the end of 2008, but most of the shift out of money markets has been by institutions, not retail investors, Investment Company Institute data show.

"Investors are much more risk-averse, and this will most likely affect them for at least the next three to five years," Cohen says. "What's different is clients are focusing more on limiting their downside, whereas before (the financial crisis) the focus was on how much they would make."

A recent poll by the American Association of Individual Investors confirms that individuals are underinvested in stocks. Individuals had just 54% of their money invested in stocks at the end of August, below the long-term average of 60%.

Consider Glenn Salka, a 57-year-old empty-nester from Fair Lawn, N.J. Despite the fact that he and his wife still have their jobs, paid off their mortgage a year ago, and are financially fit thanks to years of "prodigious" budgeting, Salka is still wary of the stock market. He has cut back his allocation of stocks in his 401(k) to 40% of total assets, down from 70%. His wife sold all her stocks earlier this year at a loss.

"I'm just not comfortable with the long-term outlook," Salka says. For now, he's taking a wait-and-see approach to see if the stock rebound is for real. Salka is no longer putting fresh cash into stocks. "100% is going to safe investments," he says. Each month he opens a new six-month CD.

Bart Ruff, 45, a married dad with two kids from Lederach, Pa., is also playing it safe. While he has stayed the course with his investment portfolio, he now spends a lot of time "tracking down the highest-paying money markets and CDs" for new cash. "It's tedious work for little more than a 2% return, but it gives us a sense of security," he says.

Ruff is also staying on the sidelines when it comes to conspicuous consumption: "If the TV isn't broken we won't rush out and buy a new one."