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Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

A surprise over the holidays can bring great joy, but not if it’s a threat to your portfolio.

We all know it’s easy to get distracted during the holiday season with all of the shopping, decorating and running around. Often, important things slip through the cracks. One of the many items investors are likely to overlook this season is risk—but it’s arguably the most important concern of all

Right now, it feels like risks are increasing. Last week, while most Americans were focused on Thanksgiving celebrations, the yield on the 10-year Treasury fell to 2.169%—a significant drop from the previous week. Crude oil prices fell sharply to 13.54% after OPEC announced it would not lower its oil production.

In addition, inflation data released last week for the euro zone and Japan underwhelmed, increasing the potential for both regions to move towards deflation. And today Moody’s announced it was downgrading Japan’s debt rating on concerns that it would be unable to reduce its fiscal deficit.

Fleeting Fears

Yet, despite the flurry of concerns outside the United States, US investors have become complacent again. After a dramatic spike in the VIX in October to 26.25, volatility has dropped down to the mild sub-13 level. October fear has given way to November contentment, with the Dow Jones Industrial Average up 2.5%. And for good reason given the strong earnings season and generally positive economic data we’ve seen.

“ Perhaps the drop in the 10-year Treasury yield is telling us something about heightened risks globally.”

However, investors shouldn’t be lulled into a false sense of complacency. Perhaps the drop in the 10-year Treasury yield—often considered a better indicator of the level of fear in the market than the VIX—is telling us something about heightened risks globally. We need to understand the greatest risks facing our portfolios—especially now when we’re faced with a lot of distractions.

One of our greatest concerns is the pricing of the federal funds rate by the market. We worry about a mismatch between market expectations and what the Fed will actually do with regard to tightening. There is a risk of a significant correction in bond markets next year if the Fed raises rates mid-year, which remains our base-case scenario.

Another concern is the inability of many developed nations to hit their inflation targets, which is now being exacerbated by lower oil prices. The biggest question is whether lower oil prices will impact core inflation in developed markets. The euro zone continues to skirt deflation, but inflation remains uncomfortably low. While we believe inflation expectations in the region remain close enough to the ECB’s target level to not raise alarm bells, the risk remains.

Even the United States is seeing a downtick in shorter-term inflation. While the FOMC is not overly concerned because it believes longer-term inflation is well-anchored, some risk remains. If core inflation in the US begins to decline, combined with medium-term inflation expectations, then we should be more worried.

Falling oil prices could lead energy companies to stop making capital expenditures

Separately, there are other risks created by the drop in the price of oil. While there are a lot of benefits to the fall in oil prices, there are some disadvantages too. The most obvious drawback is the decrease in earnings for energy companies. There’s also the potential for energy companies to stop making capital expenditures. That could drag down overall capex spending given that the energy sector comprises a meaningful portion of capex spending.

We also need to worry about what OPEC’s continued oil production and the dramatic drop in oil prices could do to Russia, which is being economically knocked around right now. Having seen what Vladimir Putin has been capable of in the past year, we don’t know how he will react to greater pressure.

Another Winter Freeze?

Meanwhile, there are mounting concerns about another snowpocalypse in the Northeast this winter. We know what last year’s winter weather did to first-quarter GDP growth. We could see a repeat performance—or even worse if early predictions about this winter are correct. While bad weather is unlikely to stop spending but rather postpone it—as we saw last winter—it’s important to recognize the potential downside.

“ … investors should take time to recognize the potential for risks to the market and their portfolios rather than reacting to them after they happen.”

Of course these aren’t the only risks. But the key takeaway for investors is that they should take time to recognize the potential for risks to the market and their portfolios rather than reacting to them after they happen. They also need to assess whether such risks, if realized, would do significant damage to their portfolio given their asset allocation and time horizon. And damage doesn’t just mean a drop in value—it could mean a loss in liquidity.

Finally, depending on whether the risk could cause significant damage, investors need to either reallocate their portfolio or recommit to their asset allocation. So when that risk is realized, investors can operate in an emotional vacuum and not make mistakes that are all too common when risks are realized without having been contemplated.

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Gross domestic product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

The CBOE Volatility Index ® (VIX ® ) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk. Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585, us.allianzgi.com. 1-800-926-4456.