It’s when investors are buying riskier assets like stocks, rather than safer ones like treasuries.
Let’s start with an analogy first.
You wake up late for work and you have to get going, but you’re really hungry. You can take the safe route by making a quick breakfast and getting to work on time, thereby protecting your principal. Your principal is your timelines getting to work.
Or you can go to the really good deli down the block. The additional risk you take — potentially losing your principal, or timelines, — means you expect a premium return in the upside scenario. You’re going to that deli because of that amazing bacon egg and cheese. You may be late to work, but you may not and hey — that sandwich is worth the risk.
Okay, one could argue that’s financial markets in a nutshell.
Recently, you may have hard people say “risk-on” as the last week or so has seen isolated days where investors are buying stocks and risky high yield bonds and not buying safe treasury bonds. The U.S. stock market had entered a bear market because of the Coronavirus, before the long-term risk-reward became more attractive in stocks.
With stocks, you can lose your principal, or the amount of money you put down to own the shares. Stock prices are volatile. But on the upside, they provide the best potential return compared to any other asset class in the world.
High yield bonds are risky in the same way — slightly less so because they are a mere promise to repay principal and interest with existing cash — but they are slightly less risky and slightly lower yielding.
Treasury bonds pay low interest, but no one is worried about the government’s grade-A credit. You won’t lose your principal.
To see what this all means for the market in 2020 and going forward, watch the quick video above.
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