The prudent investor rule (also called the prudent person rule) requires fiduciaries, such as trustees, to invest and manage trust property and assets with the care, skill, and caution that a prudent investor would exercise under similar circumstances. The rule was first established in Harvard College & Massachusetts General Hospital v. Amory, 9 Pick. 446, 26 Mass. 446 (1830), which directed trustees to consider both the probable income and the probable safety of capital. Modern applications of the rule have evolved to reflect Modern Portfolio Theory (MPT), which emphasizes the overall performance of the investment portfolio rather than the prudence of individual investments. Trustees must therefore diversify assets, balance risk and return, and act solely in the beneficiaries’ best interests.
The rule has been codified in many states through the Uniform Prudent Investor Act (UPIA), which provides that fiduciaries are not liable for investment losses if their overall strategy was prudent when made.
[Last reviewed in October of 2025 by the Wex Definitions Team]