Buy the right shares? No, buy the right assets I began my business life as a young man by training to be an investment analyst. It was my job to pick shares in British companies which would beat the stock market. I moved on to become an investment director responsible for the savings of many in pension funds, unit trusts and private portfolios. In the Eighties, the UK fund management industry typically ran funds with a majority of the assets in British shares and government bonds. The more adventurous would put some money into US and Japanese equities. Analysts and managers spent a lot of time and effort on trying to find UK shares that would do better than the market. The more I looked at what we did and the results it produced, the more I realised that the main decisions over how much to have in shares, how much to have in bonds and how much to have in cash - or something else - had far and away the biggest impact on performance. It was possible from time to time to find a share or two that did much better than the market and to accumulate decent holdings in it. Sometimes it was possible to build a share portfolio that could beat the market for a sustained period. However, if shares as a whole went down, that was likely to have a far bigger effect than choosing a few shares that were above average. I became interested in low-cost tracker funds. These enabled you to put a portion of your share money into a portfolio of shares designed to match market performance. It cut the costs of management, as it did not require lots of expensive share analysts to pick stocks. It protected you from mistakes and errant market moods that can disrupt the best planned of share picking strategies. Investing in an index is a Darwinian process. The index mercilessly throws out the worst performing shares at regular intervals, and promotes the better performing shares coming up. The index is, if you like, a kind of formulaic momentum investor, backing the shares that are stock market successes. If you do not want to be a momentum investor then you can buy a very widely based index. If you fancy a value approach, buying shares that are not so popular, you can buy a high dividend index, which will tend to give you more cheaply priced shares where you hope the companies will recover. Recently I helped set up a new investment business which spends time and money on trying to help funds and savers choose the right general assets. We implement the agreed strategy through low-cost index trackers. That way we keep the costs of investment management down, avoid making errors through stock picking, and concentrate on the things that make the biggest difference to results. There is no one right answer to how much you should have in shares or bonds or cash. It depends on how much risk you can afford to run, the time period over which you are making the investment, and whether you need a return that beats price rises or not. The modern investment professional is trained to sit down and clarify what a client is trying to achieve, and should give honest advice on whether it might be possible or not. The result will be one of many different portfolios. Some people want a manager who will be active in moving more into shares if things look well set, and taking money out when things look bleak. Others want a manager who will take a longer-term view. Managers put a lot of effort into assessing past risk and return statistics. In the end, however much maths and science you put in, it comes down to a judgment. If you limit the number of judgments you make by concentrating just on the overall asset allocation, you remove the risk of getting the shares wrong. You also concentrate on the one thing that nearly always has the biggest impact, the asset allocation. You cannot avoid having an asset allocation. You have to accept that, and manage it as well as you can. John Redwood MP chairs the investment committee for Evercore Pan Asset Capital Management