The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court decision - Harvard College vs. Armory. (26 Mass.) 446, 461 (1830). The Prudent Man Rule directs trustees "to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."
The Prudent man Rule, which puts protection of capital ahead of chasing returns has been discarded by a large majority of financial executives, senior banking officials, government agencies like the SEC and FINRA, and the advisor down the street as being out of date, founded on archaic principles, meaningless in today's electronic information age. In its place they have erected a straw man: The Prudent Investor Rule.
The Prudent Investor Rule - Not...
The Prudent Investor Rule, simply stated, is that diversification is prudent enough. As long as your advisor takes your risk tolerance into account, completes a suitability questionnaire, shows you how to invest across industries and geography, among a variety of investment products, and in different sized companies you should be OK...and the advisor's off the hook.
Look around. It's November of 2008. The financial sky is figuratively falling. Banks are failing. The Dolts in DC keep borrowing to bail out the borrowers. The AAA rated investments of three months ago are worthless today.
There are alternatives. You do not have to follow conventional wisdom to create wealth and manage your money efficiently and effectively. Investing on the terms dictated by Wall Street wonks and the Dolts in DC is not, as we see in the next paragraph, investing at all.
Benjamin Graham the "Dean of Wall Street" and Warren Buffet's mentor, held that an investment has two essential characteristics: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
A Break with Conventional Wisdom...
If we put the The Prudent Man Rule together with the formula of Benjamin Graham it becomes clear that - regardless of how "diversified" one's "portfolio" - almost every "investment" that was presented to American consumers during the past thirty years is no investment at all; it is mostly "speculation." Calling these financial products "investments" is a ploy to justify having uninformed registered reps that are protected by their Behemoths sell these speculative products disguised as investments to misinformed consumers.
Islands of Sanity and Safety...
Mutual insurance companies and your local credit union are among the most respected financial businesses in America - and with just cause. While the rest of America's and the world's financial infrastructure is imploding, mutual insurance companies and credit unions are doing quite well. The reason that is so? They follow the Prudent Man Rule in its purest form.
Insurance policies issued by mutual insurance companies continue to increase in value tax-free, every year at a guaranteed rate and continue to pay tax-free dividends as well. Credit Unions are less at risk than other depositor funded institutions because they continue to serve a small community as non-profits. In both cases, by policy owners or depositors own the companies no outside investors greedy for profits at any cost.
Mutual fund companies and other investments do not guarantee or even hint at promising "safety of principal and a satisfactory return." They claim that "diversification" makes up for that failure. It doesn't. They claim that everything will work out in the "long term." But what if your long term is today?
It is apparent during these days of bank failures, investment company executives being indicted for foisting false financial products and promises on "we the people," and tumultuous market fluctuations that the paradigm that got us here is not going to get us out. We're in a ditch we don't want to be in...stop digging!
The stock markets, mutual funds, and virtually every financial product promoted to Americans represent unwarranted gambles - speculation - dressed up as "investments." Even the money you pour into your Las Vegas style 401(k) plan is unprotected from the speculative nature of the underlying investments and is subject to potentially confiscatory income taxation when you finally get around to drawing it out.
Secure savings in credit unions and financial growth in cash value life insurance are today - as they have always been - the surest and safest places for your money; the most solid foundation for your personal economy; the most likely source for:
secure retirement income,
ready cash for life's surprises and
a meaningful legacy for those you care most about
freedom from debt