Prudent investment

A prudent investment is the application of assets in a manner that is relevant to the goals of an investor. Doing so takes into account the following factors:

  • An appropriate time horizon for the investor's needs;

  • A level of risk that the investor feels is appropriate;

  • An investment that is appropriate within the investor's portfolio; and

  • A level of return that is adequate for the investor, while balancing the preceding factors.

A fiduciary who is responsible for the investments of a client should always consider whether the investments being made on behalf of the client are prudent investments. One makes prudent investments based on the information available at the time of the investment. Subsequent events may alter the expected outcome, so that what initially appeared to be a prudent investment may turn out to be a losing or low-performing investment. Thus, the fiduciary must continue to monitor investments on behalf of clients.

For example, a financial advisor has a new client; he is a young doctor who wants to undertake a fair amount of risk for the next few decades in order to build his net worth for retirement. In this case, the advisor could recommend somewhat riskier investments that have a prospect of significant returns, rather than recommending low-risk, low-reward investments that might be more appropriate for someone who has already retired and wants to protect his portfolio.

Related Courses

Corporate Cash Management 
Corporate Finance 
Treasurer's Guidebook