With global markets in flux, understanding your risk appetite is key to deciding when to buy, sell, or hold. But beyond market timing, the critical issue is whether your approach can withstand unexpected downturns. Shifts in economic conditions, government regulations, and international tensions all play a role in shaping market behaviour. Lately, volatility in the US, driven by trade policies and equity market swings has raised alarms for investors globally, including those of us in Australia.
If the latest headlines from the U.S. have you feeling uneasy about your investments, you’re not alone. Market swings often spark fear, but making decisions based on emotion usually leads to unfavourable outcomes. The best way to handle uncertainty is by knowing your risk tolerance and making sure it matches your long-term plan. This way, you can remain steady even when markets get rough.
But what is risk appetite and how can you ensure yours aligns with your investment strategy?
What is Risk Appetite?
Risk appetite is your comfort level with taking on risk in your portfolio to gain a targeted return. Otherwise known as risk tolerance, it reflects how much volatility of investment returns an investor can handle, for a desired return outcome. In simple terms, several factors shape this, such as your financial objectives, time horizon, and how you personally react to market swings and potential losses.
Factors Influencing Risk Tolerance
- Financial Goals: Your reason for investing should always influence the risk you take. Someone planning for a major expense, that requires a lump sum, should naturally adopt a more conservative investment approach for this goal, than their longer-term objectives.
- Investment Horizon: The duration you maintain your portfolio positions significantly influences your acceptable risk levels. Those with extended holding periods often find they can accommodate more volatility in their investments, as time provides opportunities to overcome temporary market setbacks through compounding and recovery cycles.
- Personal Comfort Level: This is a more subjective measure, relying on your individual attitude towards risk. Conservative investors often prioritise capital preservation through stable, lower-yielding assets, while those comfortable with greater risk typically embrace market swings as opportunities for potentially higher rewards.
The Australian Market Context
Australia’s financial market is not immune to global influences. Recent news from the US, particularly regarding tariffs and stock market fluctuations, have had a ripple effect on the Australian market. To varying degrees, investors will have seen changes in the value of their portfolios, likely leading to feelings of uncertainty or even panic.
However, it’s important to remember that the Australian market has its own dynamics and strengths. The country’s robust regulatory framework, diverse economy, and strong financial institutions provide a level of stability that can help mitigate some of the impacts of global volatility.
What’s Been Happening in the US?
The U.S.-China trade war escalated sharply in early April 2025, with tit-for-tat tariff hikes reaching historic levels. On April 9, the U.S. raised tariffs on Chinese imports to 145% which was framed as a “reciprocal” measure under IEEPA authority, prompting China to retaliate with 125% tariffs on U.S. goods (as of April 11th) a move Beijing declared would render American exports “effectively unmarketable”. These punitive rates, apply broadly, though the U.S. maintains a 145% tariff on select Chinese goods like coal and LNG, deepening supply-chain disruptions.
The volatility has rattled global markets: the S&P 500 plunged into bear territory, and the Dow Jones index lost 4,000 points in just 48 hours, marking the first back-to-back 1,500+ point loss in its history, amid panic over inflation and stagflation risks. While the U.S. announced a 90-day pause on tariffs for most countries (locking in a universal 10% baseline rate), which has created a healthy bounce back for share markets, China remains excluded, leaving trade tensions unresolved.
Key updates:
- China’s retaliatory tariffs remain at 125%, with no exemptions for U.S. goods.
- The U.S. maintains a 145% tariff on critical Chinese imports like energy and agricultural machinery.
- Rare earth export bans and supply-chain chaos persist, with no near-term resolution in sight.
So, as an investor what should you do now?
Assessing Your Risk Tolerance
As global markets experience heightened volatility, this presents a critical opportunity to evaluate whether your investment approach still reflects your true risk appetite. The following framework will help you assess how well your portfolio matches your current comfort level with market fluctuations:
Evaluate Your Current Investments
Review your current investment mix carefully. Do you have exposure to multiple asset classes? What is the break down in your portfolio between growth and defensive investments? Do you have a significant holding in any one or few single investments, like a single company share or managed fund? A well-diversified portfolio can mitigate risk by balancing potential losses across different market segments.
Consider Your Investment Goals
Revisit your financial goals and timelines. Have there been any changes that might affect your risk tolerance? For example, if you are nearing retirement, you may want to shift to a more conservative investment strategy.
Reflect on Your Reactions to Market Changes
Think about how you have responded to recent market fluctuations. Did you feel panicked and consider selling your investments? Or were you comfortable riding out the volatility? Your reactions can provide valuable insights into your risk tolerance.
Adjusting Your Investment Strategy
If you find that your current investment strategy does not align with your risk tolerance, it may be time to make some adjustments. Here are a few strategies to consider:
Rebalance Your Portfolio
Portfolio rebalancing is the process of realigning your investment mix to stay consistent with your target risk profile. This strategic adjustment typically requires trimming positions in assets that have appreciated significantly while increasing exposure to underweighted holdings.
Increase Diversification
Including multiple investment types, like equities, fixed-income securities, and property holdings, creates a more balanced approach that can soften the blow when certain market sectors experience downturns.
Consider Defensive Investments
More conservative assets, like treasury securities or established dividend-paying companies, typically experience smaller price swings and can help anchor your portfolio when markets become turbulent.
How Can Yield Help?
The recent market turbulence, fuelled by shifting US economic conditions and global tensions, may understandably leave investors feeling unsettled. Rather than reacting impulsively, the key lies in clearly understanding your personal risk tolerance, need for income and liquidity and ensuring your portfolio reflects it. Markets will always fluctuate, but by regularly reviewing and adapting your strategy, you can face volatility with greater assurance.
If you’re questioning whether your current investments truly align with your goals and risk comfort, we’re here to help. Contact us today for a no-obligation discussion. Make sure you’ve built a strategy that withstands market shifts and keeps you on track toward your financial future.
