The bond market's horrific two-month stretch is teaching U.S. investors who poured some $700 billion into fixed income mutual funds in recent years a harsh lesson about risk.

Bond funds have been absolutely crushed in the recent Treasury market selloff that began after Federal Reserve Chairman Ben Bernake announced a second round of government bond-buying, dubbed quantitative easing 2. The downdraft accelerated in recent days amid fears the U.S. budget deficit is out of control.

Long-term government bond funds have lost 9.4 percent from mid-September through December 7, according to Morningstar. And the price of the iShares Barclays 20+ Year Treasury Bond ETF is down 11.4 percent.

The losses came as a painful wake-up call for investors who have been buying bond funds hand over fist for most of the past two years. Through late November, investors have poured a net $268.4 billion into fixed income mutual funds this year while yanking a net $30.9 billion from stock funds, according to data compiled by the Investment Company Institute.

Investors have pulled money from U.S. stock funds for seven months in a row.

That has kept the basic trend intact that began amid the Lehman Brothers bankruptcy in 2008. Investors withdrew $243 billion from stock funds and added $404 billion to bond funds in 2008 and 2009.

And an annual survey of wealthy investors released on Wednesday by the Spectrem Group found only 23 percent plan to invest more money in equities over the next 12 months, down from 25 percent in the 2009 survey and 36 percent who were looking to add stocks at the end of 2008.

Investor appetite for bonds was basically unchanged at 17 percent. Cash remained king with 40 percent planning to add money.

If you look at bonds or stocks, they're not compelling asset classes no matter what your risk appetite, said Jason Huntley, chief investment officer at money manager Mars Hill Partners in Colorado Springs, Colorado. That does create a dilemma.

The lack of evident enthusiasm has not deterred a growing group of bullish stock managers from predicting that 2011 will be the year when stocks come back in vogue.

The next year will see a resurgence in equities investing, marking the end of the bull market in bonds, Martin Sass, founder of asset management firm MD Sass, said on Tuesday, speaking at the Reuters 2011 Investment Outlook Summit in New York. U.S. equities are the cheapest major asset class out there, Sass said.

Blackrock chief equity strategist Bob Doll, who helps manage more than $3.3 trillion in assets, told the Reuters summit on Wednesday that the deal to extend the Bush-era tax cuts will accelerate the move of cash into equities and out of fixed income.

First of all, an unknown is removed. Markets don't like unknowns and if you don't know something, you kind of tend to own a few more Treasuries and a few less stocks, Doll said.

Charles de Vaulx, portfolio manager at International Value Advisers, said investors ought to prefer gold to bonds if they are worried about inflation, as he is. Gold is the better hedge at a time when owning long-dated bonds may be too risky, he said.

De Vaulx, also speaking at the Reuters' summit on Wednesday, said debt worries in Europe and the temptation for the United States to inflate away some of its outstanding debt means it may be time as an investor not to own any long-dated bonds.

Plenty of clients worried about a bond bubble have called financial adviser John Gay in Frisco, Texas. Gay said he is trying to convince them to stick with a reasonable allocation to fixed income.

The worst bond bear market is a picnic compared to stock bear markets, Gay said. No matter what the apparent interest rate environment, bonds are always significantly less risky or volatile than stocks.

Those brave souls who have bought stocks since the 2008 crash have seen their investment soar. The Vanguard Total Stock market ETF is up 86 percent since the market's March 2009 low. Of course, wary investors may remember it is still down about 20 percent from its October 2007 high.

Fixed income Investment