MBE Rules · Wills, Trusts & Estates

Prudent Investor Rule

Cal. Prob. Code §§ 16045-16054 (UPIA)

The rule

Investments are judged on the portfolio as a whole under a total-return strategy considering risk, diversification, and trust purposes; no investment is per se imprudent, and diversification is required absent special circumstances.

In plain English

The Prudent Investor Rule requires that trustees manage investments based on the overall portfolio's performance rather than judging each investment individually. This means considering factors like risk and diversification to achieve the best total return for the beneficiaries, with a focus on balancing these elements.

Worked example

A trustee invests in a mix of high-risk tech stocks and low-risk bonds, aiming for a balanced portfolio that meets the trust's objectives. Despite the high volatility of the tech stocks, the overall portfolio achieves a strong return due to careful diversification. The trustee's strategy is upheld as prudent under the Prudent Investor Rule.

Memory hook

Invest wisely as a whole, not just piece by piece!

The trap

Exams may present scenarios where a single risky investment seems imprudent, but students must remember to evaluate the entire portfolio's performance instead. This can lead to confusion about what constitutes a prudent investment strategy.

How examiners test it

Questions often involve hypothetical portfolios with varying asset classes, requiring candidates to analyze the overall risk and return rather than focusing on individual investments to assess prudence.

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