Prudent Investment

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Prudent Investor Act

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

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

    A guideline that requires a fiduciary to invest trust assets ...
  4. Fiduciary

    1. A person legally appointed and authorized to hold assets in ...
  5. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  6. Prudent-Person Rule

    A legal maxim restricting the discretion in a client's account ...
Related Articles
  1. 3 Retirement Account Rules To Know
    Taxes

    3 Retirement Account Rules To Know

  2. Meeting Your Fiduciary Responsibility
    Professionals

    Meeting Your Fiduciary Responsibility

  3. An Introduction To Fiduciary Advisors
    Professionals

    An Introduction To Fiduciary Advisors

  4. Can You Trust Your Trustee?
    Home & Auto

    Can You Trust Your Trustee?

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center