Asset allocation is a difficult process if only because the most effective way to add value to a balanced portfolio may be to focus on the least comfortable asset class. But simple calculations of market returns—the current yield for cash equivalents, the yield to maturity for bonds and the dividend discount model rate of return for equities—can provide valuable guidance for asset allocation by revealing the relative market outlook for various asset classes. The use of a disciplined approach for including other information, such as recent inflation and economic experience, can give still more insight into return prospects for each asset class.

Transforming this information into an asset deployment strategy is, of course, the critical step. If it is handled in an arbitrary or casual fashion, the temptation will be to ignore the opportunities at precisely the wrong time. A systematic approach to transforming outlook into deployment can direct the portfolio manager to asset classes with the highest returns, regardless of the prevailing consensus.