Ever seen significant changes in the market without any reason behind? Like just a sudden swift. All of these are sometimes found by what we called “risk off and risk on mentality.”.
What exactly does this mean?
Think of it as an investor’s sentiment, which is driven by fear or optimism.
Risk off = Fearful
If investors are being fearful due to a high uncertainty outlook or significant policy change, then they will be reluctant to put all their assets in a “high risk, high return” type of asset or even on any investment. They sometimes go for safe haven assets or even high-liquidity assets such as cash to reduce the risk of uncertainty. Therefore, they might sell out their asset to take on the profit they have gained. So all of these are the characteristics of what we called “risk-off” mentality. With that being said, the goal is to preserve the capital rather than generate a high return.
Risk on = Optimism
Vice versa, if you have optimism about the economic outlook and anticipate a high return, then this is called “risk on.” They would pull most of the asset to generate a more income stream and return on investment.
Factor cause
To review, most of the sentiment shift is mainly due to uncertainty in the economic outlook, policy changes either from the government or central banks, market manipulation, or the market players’ opinions, such as Warren Buffett or Ray Dalio.
For example, if the central bank raises interest rates, this signals a tightening monetary policy that can slow down economic growth and lead to risk-off behavior.
The 2009 financial crisis is also another profound example of the prolonged “risk off scenario,” triggered by the collapse of the housing market and subsequent banking crisis.
Take a look at recent news: A $1.5bn hack of crypto exchange ByBit by North Korean. A big boom in news leads to a risk-off mentality as investors who hold on to bitcoin are being fearful of their underlying asset. In response, Bitcoin has dropped dramatically to below $85,000 and other coins’ prices have dropped. Along with how Warren Buffett sold off his underlying assets and held on to cash more, it was also another factor to influence many to do the same thing. All of these are what have led to turbulence in the stock market, commodities, and crypto market.
Please note that manipulation can take various forms and is subject to regulatory oversight
Comparison Between Risk On and Risk Off
Favored assets during each period
Dive deeply into what kind of asset would be very beneficial for risk-off and risk-on mentalities, as not all risk-off strategies deserve to hold on to cash or do nothing. Just like what Warren Buffet said, “Be fearful when others are greedy. Be greedy when others are fearful.”
And even if the market is quite unpredictable, there are some assets you may consider below:
- During risk-off environment, most people are seeking either safe haven assets such as GOLD, government bonds, certain currencies such as USD, Swiss Franc, JPY, etc., or defensive stocks (KO, WMT, Unilever, JNJ, or stocks related to utilities or necessary daily consumption)
- During a risk-on environment, investors normally focus on new inventions or tech companies that involve new technologies like AI, cloud computing, electric vehicles (NVDA, TSLA, APPL, etc.), or medical breakthrough companies.
All of the above descriptions are not meant for investment advice; therefore, kindly take them as part of your consideration before making any informed decision.
