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NEW YORK (Fabian Capital Management) -- The risk of complacency is one that you can never really quantify. Often doing nothing is the hardest thing to do, but can be the most fruitful if you investing in a profitable trend or looking for a particular setup to give you an edge.

Other times, complacency is like a drug that lulls you to sleep only to wake up and find out that the reality you had become accustomed to is no longer at hand.

Despite the best efforts of top calling experts, the market has continued to grind slowly higher over the last several months. Some believe that we are entering dangerous "bubble" territory that is going to culminate in a blow up of epic proportions. Others think that we could easily see the Dow Jones Industrial Average top 20,000 before the next corrective phase takes hold. Ultimately, those differing opinions are what make a market and provide both sides with strong motivation to position themselves for the best possible outcome.

With the summer doldrums firmly in place, I have found myself pondering what the next big move in the market is going to be. Both stocks and bonds have come a long way since this time last year and we are now in a much different dynamic than the panic-induced taper tantrum that was overcome in 2013.

The fact that we have gone nearly two years with the SPDR S&P 500 ETF (SPY) - Get SPDR S&P 500 ETF Trust Report trading above its 200-day moving average is only adding to the sense of calm that the markets have instilled.

The following list details many of the top risks associated with today's complacent markets:

    Junk bonds have reached extreme levels with risk taking pushing yields to historic lows.

    Small-cap and retail stocks have underperformed in 2014 and may be a leading indicator of weakness.

    The Fed is exiting its quantitative easing efforts in the near future and will be looking to hike rates in early 2015.

    Companies are firmly focused on beating earnings and initiating share buybacks as opposed to creating long-term wage growth or reinvesting in new products.

    The length of time without a normal 10% correction is continuing to extend every day.

    The CBOE VIX Volatility Index shows an overall lack of fear in the marketplace and sense of complacency.

    Treasury bonds, utility stocks, and other interest-rate sensitive asset classes have been outperforming. These safety trades continue to show no signs of slowing down.

    Geopolitical risks in Russia, Ukraine and the Middle East have continued to escalate.

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    Trading volume continues to slowly trend lower and may indicate a lack of institutional conviction.

    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) - Get iShares MSCI USA Min Vol Factor ETF Report and the First Trust NASDAQ Technology Dividend ETF (TDIV) - Get First Trust NASDAQ Technology Dividend Index Fund Report. 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) - Get iShares JP Morgan USD Emerging Markets Bond ETF Report. 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.

    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.

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    This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.