I see that many people are still confused about a real recession. It’s not just a normal drop in prices, but a long-term contraction of economic activity across the entire system, which heavily impacts our investments.

According to the definition of the U.S. National Bureau of Economic Research, a recession occurs when economic activity declines significantly for at least 2 quarters, based on various indicators such as GDP, income, the unemployment rate, and production. If the recession lasts longer than 3 years and GDP is negative by more than 10%, it becomes a depression (Depression)—which American history has experienced only once, from 1929 to 1939.

What’s interesting is that there are many types of causes of recessions. Sometimes they are triggered by asset speculation; sometimes by oil crises or by excessive credit expansion. In the 2007–2009 period of the Great Recession, the cause was a financial crisis that began in the real estate sector. Home prices rose from 140 in 2000 to 220 in 2006–2007, but when prices turned downward, complex financial instruments burst, leading to a 5.1% contraction in the economy and unemployment surging to as high as 10%.

I’ve noticed that when a real recession happens, risk across the system increases a great deal. Investors then rush to switch to safer assets—such as gold and bonds—rather than holding stocks and oil. For example, during the COVID-19 crisis of 2020, the Dow Jones index fell 38% in less than a month, but gold rose 32%. Returns on 10-year bonds fell 80% (prices increased because people were competing to buy).

For people who are investing: during a recession, what should you not do? First, you should not increase investment in risky assets, because the downside risks are numerous. Second, you should avoid taking on high levels of debt. If you must borrow, choose fixed-rate loans (FRM) rather than adjustable-rate loans (ARM).

But if you prepare well, a recession can turn into a golden opportunity. You should shift to safer assets to some extent, keep your recurring income sources stable, and use the timing when stock prices are lower to buy good stocks at bargain prices. The experience of investors who have gone through multiple crises repeatedly shows that diversification is the key.

In summary, a recession is not something you need to fear. If you understand how it can happen and prepare your investment portfolio in advance, a recession can become a period for building wealth more than normal times.