What Is Risk-On Risk-Off?

Risk-on-risk-off investing relies on and is driven by changes in investor risk tolerance. Risk-on-risk-off (RORO) can also sway changes in investment activity in response to economic patterns. When risk is low, investors tend to engage in higher-risk investments. Investors tend to gravitate toward lower-risk investments when rไisk is ꦫperceived to be high.

High-Risk vs. Low-Risk Investments

Investors' appetites for risk rise and fall over time. Risk is the uncertainty associated with investments that may negatively impact a financial portfolio. Because younger investors have a long-term 澳洲幸运5官方开奖结果体彩网:time horizon, they commonly take more risk. In contrast, investors close to retirement may choose 澳洲幸运5官方开奖结果体彩网:conservative investments and vehicles with lower risk.

Not all 澳洲幸运5官方开奖结果体彩网:asset classes carry the same risk. Investors tend to change asset classes depending on the markets. Stocks, mutual funds, and exchange-traded funds (ETFs) are generally considered riskier assets than government-issued bonds.

Risk-On

Asset prices commonly follow the risk sentiment of the market. Investors look for changing sentiment through corporate earnings, 澳洲幸运5官方开奖结果体彩网:macroeconomic data, and global central bank action. An increase in the stock market or where stocks outperform bonds is said to be a risk-on environment.

Risk-on environments can be carried by expanding corporate earnings, optimistic economic outlook, accommodative central bank policies, and 澳洲幸运5官方开奖结果体彩网:speculation. As the market displays strong influential fundam🎀entals, investors perceive less risk about the market and its outlook.

Risk-Off

When stocks are selling off, and investors run for shelter to bonds or gold, the environmen♕t is said to be risk-off. Risk-off environments can be caused by widespread corporate earnings downgrades, contracting or slowing economic data, and uncertain central bank policy.

Just like the stock market rises in a risk-on environment, a drop in the stock market equals a risk-off environment. Investors jump from risky assets and pile into 澳洲幸运5官方开奖结果体彩网:high-grade bonds, U.S. Treasury bonds, gold, cash, and other 澳洲幸运5官方开奖结果体彩网:safe havens.

The Bottom Line

Risk-on risk-off is an investment paradigm where asset prices reflect changes in risk tolerance. Risk-on environments thrive with expanding corporat𒅌e earnings and an optimistic economic outlook. Risk-off environments occur under slowing economic data and uncertain market sentiment.