BOSTON (TheStreet) -- American investors, panicky after a steady drumbeat of bad economic news and steep declines in almost all types of investments except gold, are ready to call it quits.

They pulled $23.5 billion from U.S. stock funds in the week ending Aug. 10, more than any entire

month

since October 2008, the time of the last market crash. And no wonder. The benchmark

S&P 500 Index

has tumbled 17% from its April 29 peak, edging close to a bear market.

For this year, the S&P 500 is down 10%, while over the past five years, its average annual return is a loss of 0.52%. In other words, many investors have made no money for half a decade or longer.

But, surprisingly, behavioral-finance experts say that, if the past is prologue, investors will eventually skulk back in to the markets for another go at building wealth.

What we're seeing now is investors' emotions ruling their investing decisions, said Meir Statman, professor of finance at Santa Clara University in California and a renowned expert in the field of behavioral finance. "I don't think they're out of market for good; we've been through things like this before."

But the volatility, coupled with big swings in share prices, "have made investors fearful," he said, "and from my work, I know that people tend to extrapolate from recent returns," especially when they are at extremes.

But most investors' tend to follow the pack, and right now that's pushing them to get out of equities. "Investors think low returns are going to follow low returns," so they give up, Statman said, which only exacerbates a market sell-off. So the declines may continue but not for the long-term unless there's an extraneous event that does harm to the U.S. economy.

As for investors who give up, "on average they are wrong," when they choose to do so, Statman said, because research over multi-year market cycles has shown that market pessimism "is followed by periods of relatively high returns" and, conversely, "periods of optimism are followed by relatively low returns."

The S&P 500's drop through Aug. 8 drove the index to a valuation of 12.2 times reported earnings, the lowest since March 2009. That's a date dear to many investors today -- but not at the time -- because that's when stocks bottomed out and began a rally that lasted for more than two years.

Lisa Koonce, a professor of accounting at the McCombs School of Business at the University of Texas who has studied the psychological factors that foster investment decisions, has come to similar conclusions at Santa Clara's Statman.

"People will react to what's happening in the short term, even when they shouldn't," she said. "And rather than hang in there and ride it out," they sell. "That's what we're seeing now."

The most recent example of that herd mentality in action was in October 2008, when the S&P 500 fell about 20% in one week and the index ended the year with a 37% decline.

That led many investors to bail out of equities and, as a result, they missed out on some of the best two years of the decade as the benchmark gained 27% in 2009 and 15% in 2010.

A positive trend that has come out of this year's market dive is that do-it-yourself investors are now seeking advice from professionals, spurred by the unusual chain of events this past year.

Chris McDermott, a senior vice president at mutual fund giant Fidelity Investment's Personal Investing unit in Boston, said his firm is seeing many more investors, especially those that have sizable portfolios and nearing retirement age, opt for managed accounts so they can delegate decision-making to professionals in lieu of continuing to manage money on their own.

Similarly, Susan Freed, president of Freed Advisors of Chevy Chase, Md., said her firm, which manages individuals' portfolios in the range of $1 million to $3 million, said her firm has had many calls in the past few weeks from those seeking her firm's services.

"These are individual investors who have been managing their own money and are very stressed out and feeling like they're out of their league" when it comes to investing in the current market environment, she said. "But we're not hearing, 'We want to get out of the market.' We're hearing, 'I don't' want to do this anymore by myself.'

"This volatility has shaken them to their core. They may be in their 50s and 60s, and earning at their peak level and they're drawing closer to retirement and see their assets diminishing, and feel that their nest egg is in jeopardy," said Freed.

Freed said her firm has positioned its clients' portfolios much higher in cash than in equities on a historical basis, and it's made some short-term bets on various indices that have worked. But the main goal is to preserve capital right now. "Cash is king at a time like this."

John Wilkins, president of Wilkins Investment Counsel, a private Boston firm that manages a $184 million fund, said he's been in the investment-management business for 42 years and seen similar scenarios where investors' decision-making is driven by fear.

He said some degree of caution is warranted now given the many economic and political challenges that the country and the world face, "but we've had very few calls from people asking, "What the heck is going on?

"We tell our clients to stay the course. Right now, we don't' think we're in a recession," although the outlook for economic growth in the second half of this year is particularly disappointing and events ranging from a collapse in consumer confidence and the possibility of a major banking crisis in Europe spreading to U.S. banks means "you can't rule that out."

He says there are tried-and-true investment strategies that will see you through the tough times, such as investing in high-quality, dividend-paying stocks.

His fund's current top pick is

International Flavors and Fragrances

(IFF) - Get Report

, which makes up 4.5% of the portfolio. It makes ingredients used in a wide range of consumer products, including perfumes, soaps, prepared foods and beverages. It carries a 2.3% dividend yield.

Another stock that he favors is

Newmont Mining

(NEM) - Get Report

, the world's second-largest gold producer, which carriers a 2% yield.

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