Behavioral Finance: Addressing Biases in Wealth Management

You are an advisor tasked with managing the portfolio of a high-net-worth individual, Mr. Smith. Mr. Smith has expressed a strong desire to maintain a conservative investment strategy due to a recent market downturn. However, he also possesses a significant portion of his wealth tied up in a single underperforming stock, which he has held for several years, believing it will eventually rebound. This behavioral bias indicates a loss aversion that is affecting his overall wealth accumulation and portfolio diversification.

Using the principles of Behavioral Portfolio Theory, explain how Mr. Smith's psychological factors influence his investment decisions, and recommend a tailored investment strategy that would address his biases while optimizing his portfolio performance. Consider the implications of loss aversion, mental accounting, and the potential impact of framing effects in your analysis.

Your response should clearly illustrate how addressing Mr. Smith's behavioral biases can lead to a more rational and effective investment strategy that aligns with his long-term goals.