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Simple English definitions for legal terms
Prudent Investor Rule
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A quick definition of Prudent Investor Rule:
The Prudent Investor Rule is a guideline that says when someone is in charge of investing money for someone else, they must be careful and smart about it. This rule has been updated over time to make sure that the investments are diverse and well thought out.
A more thorough explanation:
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.