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. Last Updated: 07/27/2016

Fear of Investing Hits All the Wrong People

WASHINGTON -- The emotion that rules the lives of most investors isn't greed. It's fear. And in the market, fear is worse than greed. It causes you to sell too soon, buy too late -- or never buy at all.

This disease, which I'd call "equityphobia," or plain old risk aversion, can be very costly, as anyone who has missed the doubling of the Dow Jones industrial average over the past three years knows well. Even in a normal market, if you invest $10,000 in stocks, you should have (without allowing for taxes) about $80,000 in 20 years. Invest solely in a mix of bonds and money-market funds yielding 6 percent and you'll have less than half that.

What's surprising and disheartening about equityphobia is that, according to recent studies, it strikes certain groups -- including women -- with more virulence than others. Are you an equityphobe? Here's a quiz on your tolerance for risk:

Suppose you've just come into a nice sum of cash, say, $100,000 -- an inheritance, a bonus, a buyout. Suppose, also, that you won't need to use any of the money for at least 10 years. Considering the high prices of stocks today, which of these two options should you choose?

1. Put the entire amount into the stock market immediately.

2. Slowly feed the money into stocks at a rate of $20,000 every three months.

3. Put it all into 10-year Treasury bonds, currently yielding 6.7 percent.

Research shows clearly that the first option should give you the highest returns. The reason is simple: The quicker you invest, the sooner you will start earning returns that historically have averaged between 10 percent and 11 percent annually.

What about the giddiness of today's market? Won't stocks turn down soon? No one can tell, and you shouldn't bother guessing. The seers might be saying the market is overvalued today (and they're probably right), but they were saying the same thing a year ago. In the six months since Alan Greenspan, the Federal Reserve chairman, warned of "irrational exuberance" in the market, the Dow has risen roughly 1,000 points, or 16 percent.

I'm not saying, however, that the second option doesn't make sense for many long-term investors. If you're scared of stocks, then a good way to get into the water is gradually.

The fancy name for this technique is "dollar-cost averaging." Consider Baxter International Inc., a hospital supply company trading at $50 a share. Invest $20,000 now and you'll own 400 shares. Let's say Baxter's price starts falling, and in three months it's down to $40. The $20,000 you invest at that point will buy 500 shares. Now you own 900 shares of Baxter at an average price of $44.44 per share while an investor who plunked down $40,000 at the outset owns 800 shares at $50.

Isn't dollar-cost averaging wonderful? Yes, but only if stock prices are going down. If Baxter rose to $60 after three months, then our cautious investor would own just 733 shares at an average price of $54.57.

The truth is that dollar-cost averaging is a bet -- mild, but still a bet -- that stocks will fall in the short term. Yes, the diving-in approach is also a bet, but it's far more reasonable, given stocks rise rather than fall over time. That is the great eternal verity about the market: Stocks go up.

A recent article by Ohio State University economists Jaimie Sung and Sherman Hanna found that single men and whites tended to be more risk tolerant, while women, blacks, Hispanics over-55s and under-25s were less risk tolerant. What's disturbing about these numbers is that the people who would benefit the most from being tolerant of risk are members of precisely those groups that are least tolerant.