Pros Panic, Retail Investors Stay Cool on Emerging Markets

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Photographer: Yellow Dog Productions/Getty Images

Maybe American retail investors aren't as clueless as some in the financial industry think.

All last month, Wall Street investment houses warned of calamity in emerging markets. By Feb. 5, the MSCI Emerging Market stock index was down almost 9 percent for the year. Conventional wisdom holds that, in times like this, retail investors panic, locking in losses rather than taking Warren Buffett's classic advice to buy “when others are fearful.”

Instead, while institutional investors freaked out, U.S. retail investors stayed cool. Actually, more than cool; in the midst of the mess they poured $3 billion a week into emerging-market funds this year, according to EPFR Global. Institutions and overseas retail investors, meanwhile, sold at upwards of nine times that rate. 

That weekly $3 billion fed into the $17.4 billion total that flowed into international equity mutual funds last month, the most since Feb. 2013, according to new Morningstar data.

All this hardly gibes with a view of the investing public as hopeless bumblers doomed to sell low and buy high. "They do everything wrong," says Lance Roberts, chief economist and chief executive officer at STA Wealth Management, summing up the pretty condescending consensus among many advisers and academics. (Of course, it's in an adviser's interest to make potential clients feel out of their depth.) But contrarian investing in emerging markets isn’t the only non-lemming-like move retail investors have taken lately. They're also ditching actively managed funds for cheaper index funds. Jack Bogle would be proud.

Related: Emerging Markets Bloodbath Highlights Up-and-Comer ETFs

Granted, individual investors haven't turned into financial geniuses overnight. Maybe they'll lose their cool. Or, they could stay calm and emerging market stocks could continue to fall for a while, making retail investors look stupid over the short term. That said, big-name investors such as BlackRock Inc.'s Larry Fink and Templeton Asset Management's Mark Mobius now say shares look cheap.

So maybe a less patronizing view of the average little-guy investor is in order. Thanks to the expensive, unwelcome education provided by the financial horrors of the last dozen years, the American public may just be savvier on money matters than they've ever been.

Photographer: STR/AFP via Getty Images

Villagers wait to receive their share of one million yuan (USD165,000) paid out in year-end bonuses by a tea company in the suburb of Jinan, east China's Shandong province, on Jan. 20, 2014. Close

Villagers wait to receive their share of one million yuan (USD165,000) paid out in... Read More

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Photographer: STR/AFP via Getty Images

Villagers wait to receive their share of one million yuan (USD165,000) paid out in year-end bonuses by a tea company in the suburb of Jinan, east China's Shandong province, on Jan. 20, 2014.

Or maybe they’re not, says Efficient Frontier's William Bernstein, when asked about the retail investor data. “I don't think that institutional investors are any smarter than retail ones,” he says. “Both are, in general, pretty dumb.” That's one way to put it. Another, less insulting way to put it: Investing is really difficult for almost everyone.

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