Why This Sign of Stock-Market Panic Is Good News For You

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Earlier this morning, the Dow Jones Industrials (DJINDICES: ^DJI  ) posted sharp gains, essentially ignoring worse than expected numbers on the U.S. employment situation and instead hoping that January's poor economic data were the product of one-time factors like extraordinarily cold weather. Yet by 11 a.m. EST, the Dow had trimmed its gains to just 48 points, and reports from Merrill Lynch and Citi Research point to a near-panic that many investors are falling prey to in light of the blue-chip index's poor performance so far in 2014.

How investors are panicking
The reports show that during the week that ended Wednesday, investors pulled out $28.3 billion from stock mutual funds and exchange-traded funds. Of those outflows, $24 billion came from U.S.-focused stock funds, reflecting the huge change in sentiment since 2014 began, and one source cited a $7.6 billion outflow from the SPDR S&P 500 ETF (NYSEMKT: SPY  ) alone. Exchange-traded funds have made it far easier for investors to make panic-driven moves, with Citi saying that about 95% of the outflow amounts came from ETFs rather than traditional mutual funds.

At the same time, investors took much of that money and invested it in bond funds. Figures from the reports put net bond inflows at almost $15 billion, with investors putting nearly 90% of that money into Treasury bond funds while avoiding poorer performers like high-yield bond funds.

Why it's good news for you
For years, many stock investors have been waiting for downward-moving prices in order to get back into the stock market. Yet for years, the stock market has defied those wishes, moving inexorably higher with only brief breaks in the general uptrend. The experience of those investors has confirmed the futility of trying to time the market, as those who've made regular contributions even as prices have risen fared much better than those who hoped in vain for corrections.

Now that the market downturn has happened, though, many investors have forgotten their conviction that they would buy on weakness. Instead, they've naturally turned to the perceived safety of iShares TIPS Bond (NYSEMKT: TIP  ) , iShares 20+Year Treasury (NYSEMKT: TLT  ) , and other Treasury-focused ETFs that promise the full faith and credit of the U.S. backing their holdings.

The forgetfulness of most investors gives you and other smart investors an advantage. By sticking to your long-term strategy, you can exploit investor panic to pick up the stocks you want at lower prices. In fact, if you have more money to invest in the market, you should want stocks to fall more dramatically in order to take greater advantage of the panic before it inevitably turns back toward euphoria.

There's no guarantee that the Dow won't keep falling well into 2014, and those who buy now could end up with sizable losses before the tide turns. In the long run, though, panic-selling at the first sign of danger could well be far more costly than riding out a correction.

Don't panic!
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


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