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Ask Lee Kranefuss for a stock pick and he will begin by telling you that 90% of the variance in investors’ returns comes from asset allocation rather than security selection. He’ll eventually add, “You can have some great wins with individual securities, but you can have some great losses too. In the long run if you are not working at a hedge fund as a professional you do not have enough time to be researching and chasing down individual securities and getting it right as frequently as professionals are. You are playing against professionals.”

The truth is this response shouldn’t be surprising. Kranefuss is sometimes called “the father of exchange traded funds,” meaning he was a leader in the movement to make it widely possible to trade baskets of securities rather than just individual stocks on the open market. ETFs now account for 12% of the $15.8 trillion mutual fund industry. Kranefuss served as CEO of iShares from 2000 until it became a part of BlackRock five years ago. The ETF provider grew to $600 billion in assets during his tenure. (It’s now the world’s largest ETF provider.) Kranefuss is now executive chairman at Source ETFs, the fifth largest ETF provider in Europe which recently launched its first fund in the U.S.

Not surprisingly Kranefuss’ recommendation for 2015 has an asset allocation twist. Like most investors Kranefuss is keeping an eye on the Federal Reserve and expects the central bank to move interests rates up toward historical norms sooner rather than later. He recommends ways to keep from getting burned by the inevitable rate hike but overall the keys here are patience and diversity.

(The transcript below has been condensed and edited for clarity.)

SELL: Long-Term Bonds

Whenever interest rates go up bond prices go down. So if you bought bonds in the last five years, particularly long term bonds, in two years you may find yourself in a position where you could earn – I am just making things up because no one knows — twice the interest by entering into the bond market then. This would be more toward long term historical trends. However if you own long term bonds already and you hold onto them you may find that they drop in value 10%, 20% or 30%. So you may find yourself in a terrible bind where you paid $100,000 for bonds but they are worth only $80,000. You won’t want to sell them then but they will be yielding just 2% a year. You could go buy bonds potentially in two years time for $100,000 that yield 4% a year and aren’t going to go down in value.

With a one year bond you don’t have to worry about it too much. The worst that is going to happen is that you are going to be in it for one year. If for one year I got whatever interest rate and it goes up 1% in that time I just missed out on one year’s interest. [The problem] is when you’ve got some of these 10, 20, 30 year bonds, which people sometimes view as safe havens. People don’t think about the fact that if they bought the bonds in a time of distress and rates come up those are the bonds that will sink the farthest if rates shift up in parallel. The price is also going to drop the greatest. So they are going to be in it for the longest period of time wondering, “How did I get here? And why didn’t I exit earlier?”

For long term investors equities are the work horses that generate real returns over the long run. Equities are the only thing that you can buy in mass in a diversified portfolio and have a secular trend of appreciation that is tied to fundamentals. You are not trying to guess: is gold going up or going down? What is happening with foreign currency markets relative to in the U.S.?