What is a trustee’s duty to diversify investments? What happens if Trustee makes one bad investment (but other trust investments are doing well)?
The prudent investor rule applies (unless otherwise stated in trust). I.e. Settlor can authorize Trustee to make nothing but speculative investments not within the prudent investor standard.
Under new law (Uniform Prudent Investor Act), we use modern portfolio theory of investing and look at the total return on investment. So Trustee won’t be held liable for losses, if everything balances out in the end. Basically, under the UPIA, invest for total return, taking into account potential appreciation and capital gain as well as ordinary income. Prudence is measured by conduct at the time of investment decision is made, not be hindsight based on outcome or performance. Under the UPIA, Trustee can exercise adjustment power in favor of income beneficiary where appropriate, and can allocate capital gain and principal to income.