By Chris Taylor

March 13 (Reuters) - By all accounts, investors have enjoyed a terrific start to 2012. Stocks had their best January in 15 years, and the Dow Jones Industrial Average raced to multi-year highs, topping 13,000 at the end of February.

So what do mom-and-pop investors think of the equity rally? They're not buying it. Literally.

Take MeLinda McCall. As chief operating officer of a software startup in Plano, Texas, the 38-year-old mom of two makes enough money to put a little aside every month. But instead of betting it on the stock market, it's been going straight into her account at Bank of America.

"I don't want it to go anywhere, and I feel if I invest it, it might vaporize," she says. "At this point I'm just going to sit on the cash until I feel better about the market. Maybe that's an ignorant approach, but at least I know it isn't going to go negative."

McCall isn't alone in preferring the security of hard cash to the uncertainties of the stock market. In January, investors tucked $123 billion into plain-vanilla savings and checking accounts, according to TrimTabs Investment Research, a Sausalito, California firm which analyzes fund flows for institutional clients. Those were the biggest inflows since last August, when the ratings agency Standard & Poor's spooked investors by downgrading U.S. credit.

"Most investor money is just going under the mattress these days," says David Santschi, executive vice president of TrimTabs. "And what isn't going under the mattress, is going into bonds."

That jibes with data from fund-tracking firm Lipper, a Thomson Reuters company, which found that investors pulled $3.6 billion from their stock funds through the end of February. That's on top of the $93 billion they yanked out last year. Taxable bond funds, meanwhile, continue to charge ahead, with $43 billion in inflows year-to-date.

What's most surprising about those numbers is that after such a strong start to the year for equities, you would expect regular investors to be diving back in, desperate for the solid returns that have eluded them for so long. But instead, 2012 is proving to be a reliable sequel to 2011, when investors eschewed stocks and sunk almost $1 trillion into savings and checking accounts.

TRUST ISSUES, SELF-DEFEATING BEHAVIOR

So what exactly is going on? It might be time for American investors to put themselves on the psychologist's couch. After the heavy portfolio damage stemming from the financial crisis of 2008 and 2009, it appears as though many accountholders have developed trust issues that aren't going away any time soon.

"The biggest reason is that investors just don't trust the stability of the system," says Santschi. "The markets have been so volatile that it makes investors nervous. If we're in such a durable recovery, and if the financial system is so stable, then why are central banks intervening more and more, and in bigger and bigger ways?"

Those deep-seated trust issues help to explain recent fund flows. But to behavioral economists, the continued reticence toward stocks isn't that surprising. The financial meltdown is still relatively recent, and the emotional overhang of those panicked moments still hasn't gone away.

"Investors who experienced substantial losses during the financial crisis have a tendency to anchor on that event," says Victor Ricciardi, a finance professor at Baltimore's Goucher College. "Many individuals are traumatized...and only want to hold money in cash-related accounts they perceive as safe and low-risk."

Moreover, by the time investors finally feel comfortable diving back in, the market may have already reached a top. Human emotions like greed and fear often goad us into terrible investment decision-making. "Buying high and selling low is a definite result of that," says Ricciardi, noting that investors who stayed away from stocks have missed out on gains of more than 100 percent during the past three years.

Equity markets could have a tough time keeping up those solid returns if individual investors don't come flooding back, say experts like David Rosenberg, chief strategist for Gluskin Sheff, a Toronto money management firm. "The general public has become gun shy because of all the bursting bubbles, and then you have the overlay of demographics, since baby boomers are in the part of their life cycle where they're worried about capital preservation. So there's a lot of reticence about putting money to work."

For those who are sitting on their cash, there's also a cost to staying moored in such safe harbors. At today's below-inflation yields, opting for cash is virtually the equivalent of burying it in your backyard. If your retirement plan factors in annual gains of five percent, say, sticking to cash just isn't going to get you to the finish line.

"Cash will give you the illusion of safety, but at what cost?" asks Matthew Tuttle, a financial planner and chief executive officer of Tuttle Wealth Management in Stamford, Connecticut. "There are very few people who can afford to earn nothing on their money and enjoy the kind of lifestyle they want."

After all, banks' money-market accounts are averaging a microscopic 0.46 percent, and interest checking isn't much better at 0.5 percent, according to financial information site Bankrate.com. Even if the Federal Reserve succeeds at keeping inflation to its target of a modest two percent, your cash holdings still won't be keeping pace. Jaded investors might reply: At least that money will still be there when you need it.

"I haven't made a move into the stock market for a couple of years now," says McCall. "I'm sure I will get back into stocks eventually. I know I'm not getting any return from my bank accounts, and I know I can't retire on that. But right now I still don't think the timing is right for stocks."

By the time she thinks the timing is right, the pros might be calling a market top.

• A Permanent Economic Emergency