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Retirement Weekly: How should a trustee invest trust assets in a bear market?


Dear Harry,

As a trustee for my brother, I am concerned with the current bear market and wondering if I should get out of the market altogether and place the funds in a money-market account until things improve. I use a low-cost financial adviser who has the portfolio diversified and invested in low-cost index stock and bond funds in a 40/60 allocation. So far, year-to-date, the portfolio is down 15% while the overall market is down 24%. The trust document states that the trustee is not personally responsible for any action taken in good faith. I have managed this portfolio for nine years with good results due to the overall good performance of the market. I know that over the long term the market conditions should improve, but I also know that my brother doesn’t understand that markets don’t always go up and he can be difficult. How should trustees act when the markets are tanking?

Dear reader,

I would advise against making any changes except, perhaps, the opposite of what you propose. A 40/60 stock to bond fund allocation is conservative and totally appropriate for a trust account. I would stick with it. If the drop in the stock market has changed this allocation, perhaps to something like 30/70 (though due to rising interest rates, bond funds have also been dropping in value), then it would in fact make sense to rebalance the portfolio back to 40/60 by investing more in the stock funds now to take advantage of the current lower value of the stock market.

To get out of the market now is akin to market timing, which would be a mistake. It locks in the losses without any opportunity of profiting from a recovery. We cannot predict what will happen with the market in the future; we can only invest prudently, which is what is required of trustees. This rule was originally set out in an 1830 Massachusetts case, Harvard v. Amory, as follows:

Do what you will, the capital is at hazard…All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs…considering the probable income, as well as the probable safety of the capital to be invested.

In other words, you are not responsible for the trust’s investment results, just for going about your investment decisions in a prudent manner. Putting the funds under the proverbial mattress or in a money-market account would not be considered to be prudent.

Of course, beneficiaries can be difficult and may be unhappy with results. If your brother asks you to sell all the trust holdings, and then the market goes up, he may fault you for following his request. After all, why does he have a trustee? Perhaps the person who created the trust knew he would not act prudently if the money was in his name. If your brother were to become insistent, I would advise requiring him to sign a release form in advance departing from standard investment principals. But if instead you continue to follow the sound investment practices you have to date, don’t worry too much about being faulted after the fact if the results aren’t as desirable as you or your brother would like. The case law is clear that you can’t be faulted for results if you follow the right processes.

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