While any one of these risks can derail the markets momentum, I don't believe that any single factor will lead to a turn in the bullish tape. Rather, the next phase (higher or lower) will be guided by a combination of fundamental and technical characteristics. There is also the potential that another unforeseen risk or opportunity will develop out of thin air.
Despite these looming threats, the market has continued to climb a wall of worry and shrug off every potential obstacle in its path. The resiliency of this rally has continued to grind down the resolve of every investor that has tried to bet against the market. It's an important reminder that the market can stay irrational for much longer than you can stay solvent.
So with all of these factors in place, how do you go about constructing a portfolio to take advantage of further upside while keeping a healthy dose of risk management intact?
My game plan starts with an allocation of stocks, bonds and cash to reduce the risk of being overly concentrated in one asset class. I tend to construct portfolios using a balanced and diversified mix of securities to take advantage of current trends, while still maintaining a primary goal of capital preservation.On the equity side, my portfolio highlights include core positions in the iShares MSCI U.S. Minimum Volatility ETF (USMV) and the First Trust NASDAQ Technology Dividend ETF (TDIV). Both of these exchange-traded funds focus on strategic allocations to large-cap stocks with healthy balance sheets and defensive characteristics. For the fixed-income sleeve, I have taken a multi-sector approach with the inclusion of the actively-managed Pimco Income Fund (PONDX). The manager of PONDX continues to seek out selective areas of the bond market that include both domestic and international holdings with a risk management mindset. In addition, I have supplemented that core holding with a strategic position in the iShares JP Morgan USD Emerging Market Bond ETF (EMB). Emerging market bonds have continued to shine this year when contrasted against lagging domestic high yield credit. Lastly, I have a modest allocation of cash on hand to take advantage of buying opportunities when they present themselves. This gives me additional flexibility to add new holdings or increase my allocation to core positions on a pullback. My drive to overcome complacency doesn't include over-trading the market or making ill-timed moves, but rather being watchful for shifting trends. If the pace of strong corporate earnings and improving economic fundamentals continues to drive stocks higher, I am prepared to rotate out of overbought areas and into more attractive value propositions. Read More: Big Swing Trade Ideas for July 28: Apple, Goldcorp, Tower Group The bottom line is that this is the time to be mindful of the risks, while still keeping in step with the markets to achieve your goals. You can't make any money if you go 100% to cash and hope for a collapse. A better strategy is to consider making incremental changes as conditions evolve to stay in line with your risk tolerance and portfolio objectives. Having a disciplined investment approach and implementing it decisively will ultimately produce superior results. At the time of publication, the author was long USMV, EMB, PONDX, and TDIV, although positions may change at any time. Follow @fabiancapital This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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