During the 1990s, modern portfolio theory provided the theoretical foundation for significant reforms in trust investment doctrine, reforms that freed trustees from a legal regime in which they faced potential liability for making 'speculative' investments. The reforms enabled trustees to pursue investment policies that protected beneficiaries against inflation risk. But the reforms worked too well: they encouraged trustees to invest a higher percentage of trust assets in equities just in time for a decade that has seen two precipitous stock market declines.

Although no sensible investment strategy would have avoided losses during these periods of market turmoil, the doctrinal reforms endorsed in the Restatement (Third) of Trusts and the Uniform Prudent Investor Act made matters worse. By structuring trust investment doctrine as a regime of vague standards, the UPIA and the Restatement provided trust beneficiaries with little protection against agency costs that would lead trustees to invest too heavily in equities. The current regime would be problematic even if its economic underpinnings - modern portfolio theory and, in particular, the efficient capital markets hypothesis - accurately described economic reality. But market behavior over the last ten years, combined with recent theoretical work, weaken those underpinnings and make the current regime’s bias toward equity investments even more questionable. A legal regime that replaced the current standard-based system with one providing trustees with 'safe harbors' for making investment decisions would provide trustees with more guidance, while simultaneously providing better protection to beneficiaries against excess market risk.