Mom and Pop missing the rally, but OK with it

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Like everyone else in the investing world, Nadav Baum watches the stock market averages race higher and higher while his clients feel as though they've not been along for the ride.

In a world where risk rules and the lowest quality stocks reap the highest gains, conservative investing strategies have suffered.

Diversification is dead, thwarted by a solitary increase in U.S. equity markets that is not being repeated in many other developed nations or in other asset classes.

So are dividends: For the $32 billion handed back to investors in the first half of 2013, dividend-payers have been dogs, far underperforming companies that pay no dividends at all.

For Baum, though, it's a price his clients are willing to pay as they ignore the daily market gyrations and stick to their knitting when it comes to strategy.

(Read More: US is healing ... if the Fed doesn't screw it up)

"My clients don't really pay that much attention to (short-term movement). They just stay on their plan, rebalance on a quarterly basis and move things around," said Baum, executive vice president at BPU Investment Management, which handles about $650 million for clients in Pittsburgh, Pa.

"For me, I just continue to buy high-quality stuff and collect dividends," he added. "It's worked for me for 25 years and it will work for the next 25 years."

Retail investors can be a fickle bunch, though, and tough to figure out.

A recent Gallup survey helped provide a a glimpse at where mom and pop stand in a dynamic market that has seen the S&P 500 surge nearly 18 percent in 2013 to a succession of record highs.

Despite the big gains, 54 percent of investors told Gallup they had benefited either "a little" or "not at all" from the recent market rally.

And they're perfectly OK with that.

(Watch: Distrust on Wall Street hurting the market?)

While missing some of the big gains, 83 percent said they don't regret their choices, and more than half said they would not be adjusting their portfolios as they hold to their long-term investing choices.

"That's totally real," Baum said of the Gallup findings. "They feel like, we're OK, we're not making a lot of money, we're not losing any money. We're up."

"Most of those stocks that the retail investors own or that they got into in the last few years are up 1, 2 percent this year," he continued. "You're getting a lot of growth from some of these high-flyer companies. Most retail investors don't own Amazon."

It seemed for a while like retail investors didn't want to own anything.

Heading into 2013, equity-based mutual funds saw outflows approaching $400 billion, an effective proxy for individual behavior as the market recovered from the financial crisis devastation of 2008 and 2009.

This year, money has started coming back in, with equity and exchange-traded funds taking in a whopping $162 billion, according to Lipper.

Some Wall Street analysts have looked at that number and combined it with a recent $80 billion outflow from bond funds to make a case for the "Great Rotation" theme of money flowing out of fixed income and into stocks.

Yet that only tells part of the story.

For the year, bonds still have positive flows of $36 billion, and it seems like much of the money leaving fixed income lately has been going into low-yielding savings and money market funds. Data firm TrimTabs, in fact, reported those two accounts took in some $108 billion over the past five weeks.

(Read More: Great rotation still a 'long way' off)

The trends are consistent with a still-skeptical investing crowd.

"Those who have been in the market for the last several years are happy with the way things are. They were never the problem," said David Twibell, president of Custom Portfolio Group, a small investing shop in Englewood, Colo. that manages about $79 million for clients. "It was the investors sitting on the sidelines. I get the sense it really is plug your nose and buy some stocks."

That crowd has been burned not only by an adherence to traditional largely-owned stocks but also by a diversification strategy that has not held up well in a high-correlation market.

When a bedrock investing principle no longer delivers, it also helps shake confidence.

"You're seeing a lot of frustration with investors and a lot of confusion as well. At the end of the day, the only place you have been able to go for the last few years has been U.S. equities," Twibell said, in a statement not entirely true but representative of the dilemma likely to be facing investors as commodities, bonds and emerging market equities all languish.

"The S&P 500 has done very well, but I don't think a lot of investors who have diversified portfolios have done nearly as well," he said. "If you have a well-diversified portfolio, you're almost being punished for it."

Twibell thinks investors also are confused because of how much sway the Federal Reserve's actions seem to have over the market.

The U.S. central bank has been helping fuel the market rise through its $85 billion a month of bond purchases, as well as low interest rates that have helped companies buy back their own shares and help boost market prices further.

(Read More: Markets 'overreacted' to taper, ex-Fed chief says)

TrimTabs noted that in the second quarter alone, new cash takeovers and buybacks amounted to $257.1 billion, the highest total in nearly six years.

But investors find themselves hard-pressed to connect the dots, and wonder whether the market could come crashing down the way it has during the last two major bull markets, which coincided with the tech bubble and the real estate bubble.

"It's hard to have a long-term timeframe when the markets are bouncing around almost without a lot of fundamental basis," Twibell said. "I hope it doesn't continue like this, but it may well do so."

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.