Legal Definitions - Prudent Investor Rule

The Prudent Investor Rule is a legal principle that requires trustees to act prudently when investing trust property. This means that trustees must make investment decisions that are reasonable and careful, taking into account the risks and potential returns of each investment.

The Prudent Investor Rule has evolved over time to reflect changes in investment theory and practice. Today, it is based on the Modern Portfolio Theory, which emphasizes the importance of diversification and risk management in investment strategies.

For example, suppose a trustee is responsible for managing a trust fund that includes stocks, bonds, and real estate. The trustee must carefully consider the risks and potential returns of each investment, as well as the overall balance of the portfolio. The trustee may choose to diversify the portfolio by investing in a variety of assets, rather than putting all the trust's assets into a single investment.

By following the Prudent Investor Rule, trustees can help ensure that trust assets are managed in a responsible and effective manner, with the goal of maximizing returns while minimizing risk.