Prudent Investment


DEFINITION of 'Prudent Investment'

Generally, any use of financial assets that is suitable for the risk and return profile and the time horizon of a given investor. Fiduciaries (such as financial advisors, attorneys, CPAs and retirement plan sponsors) who are entrusted with making prudent investments should also ensure that an investment is one that makes sense within the investor's overall portfolio and whose fees will not detract significantly from the investment's returns. A good fiduciary will monitor the performance of the investments he has chosen for his clients to make sure they are achieving their stated goals.

BREAKING DOWN 'Prudent Investment'

The Prudent Investor Rule only holds that fiduciaries must make sound money-management decisions for their clients based on the information available. The outcome of their investment decision, whether good or bad, is not a factor in whether the investment is considered prudent.

For example, if a financial planner told his 70-year old client to invest all of his money in a single stock, this would not be considered a prudent investment, even if the stock skyrocketed in value and the investor sold at just the right time to make a huge profit. This investment would be considered imprudent because putting all of one's money into a single stock is an exceptionally risky strategy, especially for someone of retirement age.

  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
  2. Prudent Investor Act

    A U.S. law that sets the standard of fiduciary duty for those ...
  3. Uniform Prudent Investor Act - ...

    An updated trust investment law that reflects the changes that ...
  4. Prudent Investor Rule

    A guideline that requires a fiduciary to invest trust assets ...
  5. Prudent-Person Rule

    A legal maxim restricting the discretion in a client's account ...
  6. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
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