I just realized that many people still don't understand what a recession is. In fact, if you understand this well, your investments will be much safer.

Simply put, a recession is a severe slowdown in the economy over a prolonged period, usually defined as a decline in broad economic activity for at least two consecutive quarters. The United States has experienced more than 48 recessions since independence was declared. Economists often use indicators such as GDP, income, unemployment rate, and retail sales to diagnose whether the economy is entering a recession or not.

Why does a recession happen? The causes are quite varied. Sometimes it’s due to an oil price crisis, sometimes from stock market speculation, sometimes from excessive debt accumulation, or even from a slowdown in imports and exports. When major trading partners like the US, China, Germany, or Japan enter a recession, it can impact other countries that rely on trade.

Let’s look at some history. In 2001, there was the Dot-Com Recession, during which NASDAQ fell over 82% in just 8 months, followed by unemployment reaching 6.3%. It wasn’t as severe as the Great Recession of 2007-2009, when GDP shrank by 5.1% and unemployment hit 10%, caused by a housing and financial crisis. Back then, the Fed intervened with QE (Quantitative Easing) of over $1.75 trillion. Then came the COVID-19 recession in 2020, which was the most severe, with GDP shrinking 19.2% in just two months, unemployment at 14.7%, and the Dow Jones index dropping 38% in a short period.

When a recession hits, investors often change their behavior. They sell risky assets like stocks and oil, and turn to safe havens such as gold, bonds, or cash. For example, during COVID, gold rose 32%, while stocks fell 38%, and oil almost became worthless. U.S. bond yields decreased because investors rushed to buy.

So, what should investors do during a recession? They shouldn’t increase their bets on risky assets, avoid high debt levels, and be cautious with floating interest loans because, as the economy recovers, interest rates tend to rise.

What should they do instead? They should shift to holding safer assets, secure stable jobs, and use their cash to buy undervalued assets during the recession. This is considered a good investment strategy. Also, if borrowing is necessary, fixed-rate loans (FRM) are safer because the rate is locked in. If the economy recovers and interest rates rise, you’ll still pay the original rate.

In summary, what is a recession? It’s a period where you need to be cautious but not panic. Preparing a diversified investment portfolio and knowing what to do when a recession hits will help you get through tough times well. If you’re well-prepared, a recession isn’t a heavy burden but an opportunity for good future investments.