Let's say I gave you $20 to play a 20-round game of coin flipping. For each round you win, you get $2.50; if you lose, you have to fork over a buck. I'll also give you the option of sitting out as many rounds as you want. How many rounds would you play?

The logical answer is "all the rounds," since the potential upside is greater than the potential downside, and you have a 50-50 chance of either result. But when a team of researchers offered this game to regular folks, the participants played, on average, just 58% of the rounds.

There was one group that played an average of 84% of the rounds. The key: The subjects had suffered brain lesions and were no longer able to feel emotions. They ended the game with an average of $3 more than subjects who had not suffered brain injuries.

"What we found out ... is that normal individuals were reacting emotionally to the outcome of the previous round," said Baba Shiv, an associate professor at the Stanford Graduate School of Business and co-author of the study. "If they lost money, they got scared and had the tendency to fall back and decline to play further." The participants with brain lesions, however, couldn't feel fear; they logically knew that the result of the previous flip had no impact on the subsequent flip, and they tended to keep playing.

"It's possible that people who are high-risk takers or good investors may have what you call a functional psychopathy," said study co-author Antoine Bechara of the University of Iowa. "They don't react emotionally to things. Good investors can learn to control their emotions in certain ways to become like those people."

Fear vs. Fact

OK, so investing isn't as simple as flipping a coin. And true psychopathy has its drawbacks. The brain-impaired subjects didn't fare so well financially in the real world; Bechara told me that "their lack of fear of the long-term consequences has led to bankruptcies and being taken advantage of by unscrupulous individuals."

So how does an investor differentiate between "bad" fear (getting scared out of the market just because it's down) and "good" fear (factoring in such real risks as a declining housing market, impending retirement of baby boomers, and potentially high inflation and interest rates)? I posed that question to Shiv, and here's what he had to say: "Fear is, in general, beneficial for human decision making. Where fear can lead to disadvantageous decisions is when there is . . . a widely accepted 'right way' and fear steers us away from the 'right way.' Investing for the long haul is a good example. The right way is to invest in the stock market and forget about short-term ups and downs."

Here's a real-world example. According to Ibbotson Associates, in just one of the 64 rolling 20-year periods between 1926 and 2008 (i.e., 1926-1945, 1927-1946, et. al.) did bonds beat stocks. So an analysis by a rational person would go something like this: "I don't need this money for 20 years, so I'll leave it in stocks."

But the bear markets of the 2000s have left most of us a bit edgy. When we question whether to sit on the sidelines until things "settle down," it's time to channel the functional psychopath inside each and every one of us.

Putting Your Fear Into Buckets It's key to remember that it's not about the value of your portfolio now, but how much the various parts of your portfolio will be worth when you eventually need the money. To help conceptualize this, many financial advisors use the concept of dividing your entire portfolio into buckets based on your time frame. After all, you're not going to need your money all at once, so why look at it as one big pot?

Generally, a "buckets strategy" for someone who is near retirement or already retired would look something like this:

• Bucket 1: The money you'll need in the next 10 years invested in safe, income-producing investments.
• Bucket 2: The money you'll need in 10 to 20 years invested in medium-risk investments such as dividend-paying blue-chip stocks.
• Bucket 3: The money you'll need in more than 20 years invested in riskier equities such as small-cap and emerging-markets stocks.

As the first bucket is depleted, the growth in the other buckets is used to refill it, so you'll always have money for the short term in safe investments. Long-term investments should be left alone for a long time to do their long-term thing.

The buckets strategy also divvies up your portfolio according to rational and not-so-rational fears. It's smart to keep money you'll need soon out of the market; stocks really could tank in a heartbeat. But if history is any guide, keeping money that you won't need for decades out of the market is neither rational nor smart. You're fighting worse odds than a coin flip.