¶ … volatile economic market, it is essential that an astute financial manger address the psychological as well as the financial concerns of a client. The article on "Investor Portfolios" acknowledges the psychological difficulties many clients have with focusing on holistic fund performance, rather than upon the performance of individual stocks. Despite the acknowledged benefits of creating a diversified portfolio to maximize portfolio return and mitigate potential investor risks, financial advisors must take the client's risk tolerance into consideration when providing guidance. Of course, it can also be quite frustrating for experts to deal with risk-averse behavior, as investors are quite inconsistent about the types of risks they feel comfortable making.
One possible suggestion for such wary investors is to limit their number of investments. This limits the number of individual funds or stocks about which the investor is concerned. The caveat must be made that to compensate for the lack of diversity, mutual funds rather than individual securities are the better option, since holding only a few stocks or even bonds could be a recipe for financial disaster, if one segment of the market experiences a financial downturn (especially in today's global economy, usually 'it is an ill wind that blows nobody good,' as some industries may actually do better during a recession). Ideally, mutual funds should represent variety of market sectors throughout the world, to cushion the investor against regional recessions.
Another psychological buffer for the cautious investor is to think of categories of investments, rather than investments in a holistic manner, such as fail-safe investments, long-term growth or retirement money (invested in stocks), and higher risk investments.
This balance will shift with the investor's age, financial profile, and willingness to tolerate uncertainty and speculation. Also, investors may want to consider holding some index funds along with more actively managed mutual funds so as to not miss out on any general market booms, although this does have the downside in that the investor will also experience every market 'bust.'
