Risk-on/Risk-off

Risk-on and risk-off are terms used to describe investor behavior relative to perceived and realized volatility. In a risk-on climate, we see increases in both allocations to and performance in “risky” investments. That includes investments offering both significant upside and downside potential. In a risk-off environment, the opposite is true. Investors shift their money out of those risky investments and into safer asset classes like bonds, which tend to deliver more reliable if smaller returns.

Generally speaking, these terms are most appropriately used when market shifts are pronounced. A normal economic climate will see average variances in portfolio allocation fluctuations, performance swings, and asset class correlation levels.  During a risk-on or risk-off period, traditional asset class correlation levels, in particular, become highly inverted.