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.