Fifty years after George Ross Goobey transformed the stock market by switching Imperial Tobacco's pension fund from bonds to shares, investors are abandoning the cult of the equity for investment strategies the Victorians would have recognised.

Ross Goobey's insight - that dividends were a better hedge against inflation than the coupon on bonds because they should grow in line with the economy - drove stock markets in the second half of the 20th century.

But after three years of falling markets, many investors are abandoning hopes of high returns and capital growth, and are investing in bonds and cash. Sales of equity funds are the lowest they have been for years as investors limit their expectations to providing a predictable long-term income.

This is an approach that would have rung bells with Anthony Trollope, whose 1858 novel Dr Thorne bemoaned the failure of his eponymous hero to secure his future income by investing £3,000-£4,000 (about £300,000 now) in the "Three per Cents", or consol gilts.

The 21st century revival of Victorian investing habits has pushed gilt prices up and yields to where they were more than 100 years ago.

But experts are worried that investors are not only turning their backs on equities, but on modern investment tools that maximise returns and minimise risk.

In the wake of the stock market boom and bust, it is not surprising that private investors have become risk-averse. Many investors put all their assets in shares in the simplistic belief that the longer the investment time horizon, the lower the risk.

This theory - based largely on the fact that sporadic spikes in share prices appear lower when averaged out over time - was "widespread but mistaken", says Mr Zvi Bodie, professor of finance and economics at Boston University. It obscured sharp losses from which some stocks never recovered.

A survey by Merrill Lynch shows institutions have rarely been more risk-averse. Many pension funds have concluded that, in an era of sustained low inflation, pensioners' need for a pre-determined level of long-term income is provided more effectively by bonds than by shares.

But investors ignore equities at their peril, say experts.

Mr Alastair Ross Goobey, son of George and an honorary fellow of the Institute of Actuaries, says: "I don't blame investors for being cautious. They have lost half the value of their equity portfolios, economies are pausing and there is the imminent threat of war, or a change of leadership from New Labour to Old Labour.

"They feel they need more certainty and can't bear the current volatility. However, going into bonds is certainly not risk-free."

Like his father, Mr Goobey maintains that the best way to tap into an economy's wealth and shield yourself from inflation is by holding shares in companies. Unlike bonds, returns are not capped, and if the UK economy accelerates again, share prices will reflect this.

What is more, yields on some equities are now unprecedentedly high - as high as on gilts.

For private investors, for whom the risks attached to shares are still unpalatably high, analysts say modern portfolio theory urges them to spread the risk of stock market involvement among other assets.

A modern portfolio should invest in a broad spectrum of shares, cash, bonds and property - asset classes that move in different directions in response to inflation, interest rates and economic growth.

Mr Burton Malkiel, professor of economics at Princeton University, argues that property funds and inflation-linked bonds that pay out a fixed coupon on top of inflation "are excellent diversifiers for a portfolio".

Academics such as Mr Malkiel and Mr Bodie are particularly enthusiastic about inflation-linked bonds - the worry-free way to invest and beat inflation, says Mr Bodie.

An inflation-linked bond provides protection against inflation. This means the principal - the amount invested - is increased by the change in inflation over a period. In most countries, the Consumer Price Index (CPI) or its equivalent is used as an inflation proxy.

As the principal amount increases with inflation, the interest rate is applied to this increased amount.

This in turn causes the interest payment to increase over time. At maturity, the principal is repaid at the inflated amount. In this fashion, an investor has complete inflation protection, as long as the investor's inflation rate equals the CPI.

Pension funds are beginning to pick up on the theory and are increasing holdings in inflation-linked bonds.

However, this is causing some bond analysts disquiet. UK inflation-linked bond prices have bounced hard since the start of the year alongside the rise in gilt prices. "Like all insurance, index-linked bonds may cost more than the risks they cover," says Mr Jim Leaviss, fixed interest fund manager at M&G.

Mr Fred Cleary, strategist and co-author of Barclays Capital's Equity Gilt Study, disagrees.

He says the price of "linkers" will be supported by constant demand from pension funds and that they remain cheap because the market has failed to price in the danger of a return of inflation.

Most economists do not envisage a return to the kind of global high inflation that was a problem when the cult of the equity was winning followers.

But they do not expect a return to bouts of deflation that marked the Victorian era.

The future remains as uncertain as it was for Dr Thorne. But tucking a small percentage of your portfolio into inflation-proofed gilts will seem like a small price to pay if inflation picks up even a little.

For the 21st century investor, index-linked gilts are tools for offsetting unwanted risks that George Ross Goobey and Trollope might have given their eye-teeth for. - (Financial Times Service)