How to Invest During a Panic

Unless you've already buried yourself in a bunker to prepare for the next Great Depression, you're seeing plenty of headlines like these:

"Dow down 300 points!"
"S&P 500 hits 16-month low!"
"Longtime bulls dumping stocks!"

If the deluge of negative financial news makes you want to sell everything and hide, you have to reverse your thinking. By seeing opportunity where others see only panic, you'll find investments that could potentially bring you your best long-term returns.

It's a buyer's market
The recent swoon in stock prices puts investors in the same position homebuyers have enjoyed for the past year. Just as areas with some of the greatest exposure to inflated housing prices showed the first cracks in the real estate market, the damage in stocks initially confined itself to homebuilders such as Toll Brothers (NYSE: TOL  ) and Hovnanian (NYSE: HOV  ) , which had done extremely well during the boom. Later, financials took a hit, starting with small players such as Accredited Home Lenders and eventually dragging giants such as Countrywide Financial (NYSE: CFC  ) to the party.

But now, as fear spreads that housing troubles will bring the entire economy down with them, stocks of all kinds are getting pummeled. Take a look at some of the carnage so far this year.

Stock

Price Change YTD

Chevron (NYSE:CVX)

(11.3%)

Sprint Nextel (NYSE:S)

(11.9%)

Sears Holdings (NASDAQ:SHLD)

(12.9%)

Caterpillar (NYSE:CAT)

(13.9%)

Source: Yahoo! Finance.

As you can see, the damage isn't limited to a single sector. You can find bargains in nearly every part of the market.

Two ways to win
You can take a couple of different approaches to investing during a panic. If you like to pick individual stocks, all of the attractive options at your disposal might make you feel like a kid in a candy store. Unlike during a full-force bull market, where you generally have relatively few prospects that haven't already seen big price moves, you can afford to be selective and pick the cream of the crop.

On the other hand, if you prefer a less hands-on approach and use mutual funds or broad-based ETFs to invest, staying with your regular investment plan is often the right approach. If you have some extra cash on the side, you might consider making a one-time additional purchase to take advantage of low prices. Over time, though, your ongoing monthly purchases will capture the ups and downs of the market.

No matter which approach fits better with your portfolio strategy, the key to investing during a panic is not to join the panic yourself. By keeping your wits about you and realizing that irrational investors are throwing out quality stocks along with the rest, you can lock in low prices for companies that you'll own for years to come.

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