Risk on Risk off

With great risk comes great reward is a quote famously attributed to Thomas Jefferson. An investor's risk tolerance is a very personal thing and their appetite for risk will change over time. 2022 has certainly begun with a bang and investors may be wondering what risks are necessary to achieve favourable rewards. This year investors are facing uncertain times where the only certainty seems to be market volatility. Currently there is geopolitical conflict with the war between Russia and Ukraine, many countries are fighting inflation along with central banks increasing interest rates.

As the market reacts to all that is happening and volatility continues, many investors may feel uncertain of what to do and how best to protect their investments. This sentiment is what is known as a “risk off” environment. But what exactly is a risk off environment? A risk off environment is one shrouded in uncertainty where investors may be pessimistic about market conditions. Investors are more averse to risk and tend to shy away from high-risk investments. They will seek out safer instruments that are less vulnerable to the effects of volatility present in the market and also sell higher risk assets.

Even in a risk off environment there are still opportunities an investor may take advantage of. One option would be to look for shorter dated bonds that have less credit risk. The shorter timeframe will expose the investor to less interest rate risk. Secondly, investors may look for short term principal protected investments like repurchase agreements while they wait out volatility. There is also the option to deploy funds to take advantage of lower prices in the market. As you invest in these times, ensure that the instruments you are investing in will grow regardless of economic conditions. A diversified portfolio where funds are appropriately allocated are better equipped to weather any storm, as different asset classes carry different risks.

Fear of volatility and knee jerk reactions to the market may creep into investment decisions during a risk off environment. However, astute investors will know volatility is a natural part of the market. Time in the market rather than timing the market, has favoured many a long-term investor. A risk off environment is not the time to make emotionally charged decisions. Before making any decisions, you should revisit your plans and speak to your financial advisor ensure you are still on track for your long-term investment goals.

Christine Rankine is the Manager -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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