The art of asset allocation hasn’t changed that much since Harry Markowitz laid the groundwork for Modern Portfolio Theory more than 50 years ago. In almost zombielike fashion, investors typically recalibrate their investment return projections every three to five years. But taking the usual approach to strategic asset allocation will result in missed opportunities, because it ignores the huge impact that economic changes can have on medium-term returns.

The fundamentals of the economy have changed dramatically during the past tumultuous year and a half. In December 2007 many people did not realize we were in a recession. Today we all know we are in a recession and that it is likely nearing its end. As a result, the target returns used in strategic asset allocation need to be adjusted. History shows that prospective returns are much higher for a portfolio formed in the middle of a recession than...