• In a sign of many investors' underlying nervousness about the economy, the best-performing fund category in 2010 was precious metals, up 41.5%, riding another surge in gold and silver prices.
The U.S. stock market was able to rack up double-digit gains in 2009 and 2010 without much help from small investors: Domestic stock funds overall suffered net redemptions in both years, meaning people were cashing out faster than new money was coming in.
Instead, investors pumped record sums into bond mutual funds.
In late December, however, the mood changed: Domestic stock funds had modest net inflows of cash for the first time since April.
And as share prices of many bond funds fell in November and December amid rebounding interest rates, the funds overall had net redemptions for the first time since late 2008.
Those shifts could just be blips, but they raise the prospect that investors' attitudes have reached a turning point.
Joe Turner, a principal at Pring Turner Capital Group in Walnut Creek, Calif., worries that small investors are showing up late to the equity rally. "We're two years into it and people now are getting a little confident," he said. Even so, he said, "We think the equity market probably has a ways to go yet."
As for bonds, with the drop in many interest rates to generational lows in the last two years, the risk is that investors had been lulled into thinking that rates would never rise again.
Although the Fed is trying to hold longer-term interest rates down with its Treasury-bond purchase program this year, the central bank's ultimate goal is to get the economy growing at a pace that would almost certainly mean higher interest rates and higher inflation.
The alternative — a sinking economy, sharply lower rates and deflation — would suit many bond investors best. But that's exactly what the Fed is fighting to avoid.