Five years after the financial crisis, individual investors are piling into stocks again amid signs that the U.S. economy is slowly gaining steam.
The buyers, many with investment portfolios that were scorched during the market meltdown, are climbing aboard a ride to new highs in the Dow Jones Industrial Average.
But the renewed optimism among retail investors is considered by many professionals to be a warning sign, thanks to a long history of Main Street arriving late to market rallies.
Mom-and-pop investors largely sat out the early years of the stock-market rebound, many of them still rattled by the 37% decline in the S&P 500 index in 2008. Meanwhile, institutions such as insurers fueled a broad rally by pouring cash into the market.
The stock market last year posted its fourth consecutive annual gain, despite economic growth that was tepid at times. Now, following a 24% increase this year in broad market indexes, individuals are feeling optimistic in a way they haven't since the roaring bull market of the late 1990s.
"I'm hanging on every piece of good news, saying we're out of the slump," said Vito Mandato, a 65-year-old real-estate appraiser who lives in Los Angeles and has put more money into stocks in recent months.
Small investors also helped power Twitter Inc.'s 73% gain last week on the day of the microblogging site's initial public offering.
Many view buying stocks as a viable strategy again, citing positive indicators including last week's stronger-than-expected data on U.S. employment. Mr. Mandato sent his adviser a note when he saw a market pundit predict the Dow, up 167.80 Friday to 15761.78, could hit 20000 this year.
"I still think there's huge upside in the stock market," he said. "I don't want to miss out."
U.S. stock mutual funds have attracted more cash this year than they have in any year since 2004, according to fund-tracker Lipper. Investors have sent $76 billion into U.S. stock funds in 2013. From 2006 through 2012, they withdrew $451 billion.
Propelling the shift: the low returns available on safe investments such as savings accounts and U.S. government bonds.
After hunkering down to shore up personal finances and pay down debt, many Americans are turning their sights to longer-term goals such as saving for retirement, buying houses and cars and paying for their children's educations. Many reason that 10-year Treasury notes paying 2.75% annually and savings accounts offering 1% or less won't allow them to make those purchases.
"Frankly, from 2009 until recently, I wanted to stay very conservative," said Chris Rouk, a technology sales manager in Irvine, Calif. Now, he said, "I want to get more aggressive."
At the height of the financial crisis, Mr. Rouk, 45 years old, hired a new financial adviser and asked her to fill his portfolio with bond and cash investments. Now he is asking her to add to his stock allocation. He recently bought extra shares of some of his favorite stocks, such as Cisco Systems Inc., in a small account he keeps with Charles Schwab as a "play fund."
"There might be small corrections here or there, but [the market] always seems to spring back up," he said.
More investors are saying they are bullish about the stock market, according to the latest poll from the American Association of Individual Investors, which found that 45% of individuals are bullish on stocks, above the long-term average of 39%. Last month, the same survey said the number of investors who said they were bearish on stocks fell to the lowest level since the first week of 2012.
The shift partly reflects the strong performance of stocks since the financial crisis. The Dow returned an average of 10.7% from 2009 through 2012.
Daniel Roe, chief investment officer of advisory firm Budros Ruhlin & Roe Inc. in Columbus, Ohio, said that one of the firm's former stock-market bears, who pulled out of stocks in 2010, called the firm in mid-October to put money back into the stock market. "It is a little scary when your bears turn bullish after such a large run up," he said.
Richard Thomson, who works in corporate finance with Citigroup Inc. and lives in Manhattan Beach, Calif., said he started to feel more comfortable with the market after last year's 13% rally. He said he has gotten more confident holding stocks this year, as "companies are becoming smarter" with their financial decisions. "If you asked me a year ago, I would have never expected to be where we are this year to date" he said.
When his financial adviser, Danilo Kawasaki, brought up starting a tax-advantaged college-savings plan for his 1-year-old daughter, Elle, he was comfortable putting all the money in stocks.
"This year feels like it did earlier in my career, when I had the optimism to say, 'I'm really going to have a retirement on this 401(k),'" Mr. Thomson said. "It feels a lot better now."
To be sure, those jumping back into the market now are heading back to stocks at a time when some observers warn they are starting to get expensive.
Stocks in the S&P 500 are trading at a price-to-earnings ratio of 14.7 times analysts' expectations for the next 12 months' earnings. That is up from 12.6 at the start of this year and just above the 10-year average of 14.1, according to data provider FactSet. Some investors note the lack of a pullback of 10% this year and say one is overdue.
Mr. Thomson, 35, says he has noticed, but that valuation fears aren't holding him back. He also says he took heart in the smooth trading in Thursday's Twitter IPO, which he viewed as sharply contrasting with the May 2012 debacle surrounding Facebook Inc.'s debut. "Twitter's one that everyone was anxious about," said Mr. Thomson. "But they managed it really well."
Joyce Soliman, a 41-year-old attorney in Houston, was another stock-market skeptic, until she got a Charles Schwab statement from her investment advisory firm, Medley & Brown LLC, showing gains of nearly 20% in the first nine months of 2013. Now she is planning to set aside more of her paycheck to invest in stocks.
"Sometimes you feel like it's too late. But it's probably never too late," she said. "It's like, 'Oh, why were we so pessimistic back then?' That kind of remorse never feels that good."
By Alexandra Scaggs, WSJ