# Risk-On Risk-Off: What It Means for Investing

![Risk-On Risk-Off](https://www.investopedia.com/thmb/qAalWgDs0XrMjQrFGOwgCZEo-NM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/risk-on-risk-off.asp-final-58f658fd0ede46a0842457cb91b06ec7.png)

*— Investopedia / NoNo Flores*

> **Definition**
>
> Risk-on risk-off investing describes how changes in investor risk tolerance influence market activity, impacting asset prices and investment decisions. In risk-on environments, investors favor higher-risk investments as market conditions appear favorable. Conversely, risk-off environments drive investors toward lower-risk assets during periods of uncertainty. Understanding these dynamics is crucial for navigating market fluctuations.

## What Is Risk-On Risk-Off?

Risk-on-risk-off investing relies on and is driven by changes in investor [risk tolerance](https://www.investopedia.com/articles/pf/07/risk_tolerance.asp). 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 risk is perceived to be high.

### Key Takeaways

*   Risk-on risk-off (RORO) investing is driven by changes in investor risk tolerance and is influenced by economic conditions.  
    
*   In a risk-on environment, investors favor higher-risk assets like stocks due to perceived lower risk.  
    
*   Risk-off environments see investors seeking safety in lower-risk assets like bonds and gold.  
    
*   Young investors with longer time horizons often take more risks compared to those nearing retirement who prioritize conservative investments.  
    
*   RORO ETFs adjust their portfolio between high-risk equities and low-risk bonds based on market conditions.

## Comparing High-Risk and Low-Risk Investments

Investors' risk appetites change over time. Risk involves uncertainty that can negatively affect a financial portfolio. Because younger investors have a long-term [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp), they commonly take more risk. In contrast, investors close to retirement may choose [conservative investments](https://www.investopedia.com/terms/c/conservativeinvesting.asp) and vehicles with lower risk.

Not all [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp) carry the same risk. Investors often switch asset classes based on market conditions. Stocks, mutual funds, and ETFs are usually riskier than government bonds.

> **Important**
>
> Risk capital is the money investors devote strictly to trades exposed to a possible loss in value.

## Understanding Risk-On Environments

Asset prices usually reflect the market's [risk sentiment](https://www.investopedia.com/terms/m/marketsentiment.asp). Investors watch corporate earnings, macroeconomic data, and central bank actions for shifts in sentiment. An increase in the stock market or where stocks outperform [bonds](https://www.investopedia.com/terms/b/bond.asp) 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 [speculation](https://www.investopedia.com/terms/s/speculation.asp). As the market displays strong influential fundamentals, investors perceive less risk about the market and its outlook.

## Navigating Risk-Off Markets

When stocks are selling off, and investors run for shelter to bonds or gold, the environment is said to be risk-off. Risk-off situations occur when corporate earnings decline, economic data slows, or central bank policies are uncertain.

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 [high-grade bonds](https://www.investopedia.com/terms/i/investmentgrade.asp), U.S. Treasury bonds, gold, cash, and other [safe havens](https://www.investopedia.com/terms/s/safe-haven.asp).

## What Investments Are Considered Safe Havens?

Investors look to safe havens to offer protection against market downswing or upheaval. Investment vehicles that may be considered safe havens are gold, cash, and U.S. Treasury bonds.

## What Is a RORO ETFs?

Some financial institutions offer fund investment that follows a RORO strategy. A RORO ETF rotates offensively or defensively between higher-risk equities and lower-risk U.S. treasuries. The ATAC US Rotation ETF is an example of a fund that follows this strategy.

## How Do Investors Limit Their Risk Exposure?

Risk is inherent in all investments, but investors who use [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp#:~:text=Asset%20allocation%20is%20how%20investors,tolerance%2C%20and%20the%20investment%20horizon.) and [diversification](https://www.investopedia.com/terms/d/diversification.asp) and choose multiple types of investments in varying sectors can help manage risk.

## The Bottom Line

Risk-on risk-off is a significant investment paradigm influenced by shifts in investors' risk tolerance. In risk-on environments, where optimism prevails due to factors like rising corporate earnings and supportive economic indicators, investors seek riskier assets. Conversely, risk-off settings, characterized by economic uncertainties or declining market sentiment, prompt a shift towards safer assets, such as government bonds or gold. Recognizing these patterns helps investors make informed decisions about adjusting their portfolios according to market conditions.

> **Article Sources**
>
> 1.  Financial Industry Regulatory Authority. "[The Reality of Investment Risk](https://www.finra.org/investors/learn-to-invest/key-investing-concepts/reality-investment-risk)."
>     
> 2.  Morningstar. "[ATAC US Rotation ETF](https://www.morningstar.com/etfs/arcx/roro/quote)."