Prudent Investor Rule

DEFINITION of 'Prudent Investor Rule'

A guideline that requires a fiduciary to invest trust assets as if they were his own. The managing investor should consider the needs of the trust's beneficiaries, the provision of regular income, and the preservation of trust assets and should avoid investments that are excessively risky. The prudent investor rule states that the decision-making process must follow certain guidelines, even if the final result does not satisfy the original intent.

BREAKING DOWN 'Prudent Investor Rule'

A prudent investment will not always turn out to be a good investment, because no one can predict with certainty what will happen with any investment decision. Thus, the rule only applies to the decision-making process; that is, based on the knowledge the fiduciary has at the time, is the investment a good idea? Investing exclusively in penny stocks, for example, would violate the prudent investor rule, because they are known to be risky at the outset.

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