Anyone have a good way for remembering this vs the Prudent Investor rule? I always botch these when it comes time
this is old rule and most of them are conservative. Do not allow you to take any risk.
done and done also you can delegate work
Ali, Does the prudent investor allow you to delegate work and the prudent man rule does not allow it?
New Rule : preservation of money along with growth…old just preserve.
Prudent man: some investments are inherently risky and therefore should be avoided. (Derivative, not allowed) Prudent investor: risk is viewed in the context of the ENTIRE portfolio (Derivative, allowed if used properly to hedge)
CFAdreams, yes
Diversification is expected of portfolio managers as a method of reducing risk. Trustees must base an investment’s appropriateness on its risk/return profile: how it contributes to the overall risk of the portfolio. Excessive trading (churning) as well as excessive fees and other transactions costs that are not warranted by the portfolio risk/return objectives should be avoided. Current income for the trust must be balanced against the need for growth. Trustees are allowed to delegate investment authority. In fact, this is a duty if the trustee does not have the required level of expertise The new Prudent Investor Rule makes five key changes to the traditional rules governing investment trust management. Use of total return. The new Rule measures reasonable portfolio return as total return (income plus capital growth). It also emphasizes that the trustee’s duty is to not only preserve the purchasing power of the trust but in certain cases to realize principal growth in excess of inflation. Risk management. Under the new Rule the trustee has the obligation to assess the risk and return objectives of the trust beneficiaries and manage the trust in a prudent manner consistent with those objectives, rather than to avoid all risk. Evaluation in a portfolio context. While the new Rule calls for the avoidance of undue speculation and risk, it also encourages trustees to view risk in a portfolio context. For example, stock options are risky when held in isolation but can actually reduce portfolio risk when held as part of a properly structured portfolio. Protective put options are an example of this type of strategy. Security restrictions. No securities are “off-limits” because of their riskiness when held in isolation. For example, under the old Rule options were not allowed, but under the new Rule they are, as long as the manager takes the portfolio perspective to analyzing risk. Delegation of duty. The old Rule did not permit trustees to delegate investment authority. In fact, investing in mutual funds or even index funds was deemed improper. The new Rule goes so far as to say that it may be the duty of a trustee (this is stronger language than just authority) to delegate, just as a prudent investor would.
QuantJock_MBA Wrote: ------------------------------------------------------- > Diversification is expected of portfolio managers > as a method of reducing risk. > Trustees must base an investment’s appropriateness > on its risk/return profile: how it contributes to > the overall risk of the portfolio. > Excessive trading (churning) as well as excessive > fees and other transactions costs that are not > warranted by the portfolio risk/return objectives > should be avoided. > Current income for the trust must be balanced > against the need for growth. > Trustees are allowed to delegate investment > authority. In fact, this is a duty if the trustee > does not have the required level of expertise > > The new Prudent Investor Rule makes five key > changes to the traditional rules governing > investment trust management. > > Use of total return. The new Rule measures > reasonable portfolio return as total return > (income plus capital growth). It also emphasizes > that the trustee’s duty is to not only preserve > the purchasing power of the trust but in certain > cases to realize principal growth in excess of > inflation. > Risk management. Under the new Rule the trustee > has the obligation to assess the risk and return > objectives of the trust beneficiaries and manage > the trust in a prudent manner consistent with > those objectives, rather than to avoid all risk. > Evaluation in a portfolio context. While the new > Rule calls for the avoidance of undue speculation > and risk, it also encourages trustees to view risk > in a portfolio context. For example, stock options > are risky when held in isolation but can actually > reduce portfolio risk when held as part of a > properly structured portfolio. Protective put > options are an example of this type of strategy. > Security restrictions. No securities are > “off-limits” because of their riskiness when held > in isolation. For example, under the old Rule > options were not allowed, but under the new Rule > they are, as long as the manager takes the > portfolio perspective to analyzing risk. > Delegation of duty. The old Rule did not permit > trustees to delegate investment authority. In > fact, investing in mutual funds or even index > funds was deemed improper. The new Rule goes so > far as to say that it may be the duty of a trustee > (this is stronger language than just authority) to > delegate, just as a prudent investor would. NICE!