I just noticed that the topic of recession is becoming a more frequently discussed subject among investors. Some people still don't understand what a recession means or why it is important to their investment portfolios. I dug deeper into this topic because it directly relates to our investment decisions.

In fact, a recession is a period of broad economic slowdown lasting for an extended period. Economists often use indicators such as GDP, income, employment rate, and production as benchmarks. The common criterion is two or more consecutive quarters of decline. But if it lasts longer than that—over 3 years—and GDP drops more than 10%, it becomes a depression, which only happened once in the U.S., starting in 1929 and lasting through World War II.

Recessions can be caused by various factors. Sometimes it results from changes in oil prices, sometimes from aggressive monetary policies to control inflation, or even from excessive debt accumulation. For example, in 2007, housing prices kept rising along with credit expansion. When prices fell, it triggered a financial crisis that spread into the real economy.

Looking back at the three major recessions in the U.S. since 2000: the first was the dot-com bubble burst (2001), which lasted only 8 months, with GDP decreasing by 0.3% and unemployment at 6.3%. It was caused by speculative bubbles in technology stocks, with the NASDAQ dropping 82% in a short period.

The second was the Great Recession (2007-2009), lasting 18 months, with GDP contracting by 5.1% and unemployment reaching 10%. It was more severe, caused by the housing crisis and poor financial instruments, and the economic impact spread to the Eurozone.

The third was the COVID-19 recession (2020), a large but rapid downturn. It lasted just 2 months, with GDP shrinking by 19.2% and unemployment at 14.7%, driven by the pandemic, with both demand and supply sides contracting simultaneously.

What’s interesting is how asset prices moved during recessions. For example, during COVID-19, the Dow Jones fell 38% in a few weeks, crude oil plummeted nearly 98%, gold rose 32%, and 10-year U.S. Treasury yields dropped (returns down 80%). Investors tend to shift away from risky assets like stocks and oil, moving into safe-haven assets such as gold and bonds.

Now, here’s the crucial part—what investors should and shouldn’t do when a recession hits.

What NOT to do: Don’t increase investments in risky assets, as the downside risk is very high during this period. Avoid taking on high levels of debt, as it can impair your ability to invest further. Don’t opt for adjustable-rate mortgages (ARMs), because as the economy recovers, interest rates will rise, potentially making repayments unaffordable.

What TO do: Shift to safe assets to prevent your capital from eroding. Rely on stable income sources, like a regular job, to have cash available to buy good stocks at lower prices during this time. If you need to borrow, choose fixed-rate loans (FRMs) to lock in costs. Recessions often come with rate cuts, so it’s a good opportunity to lock in low long-term borrowing costs.

I believe the key point is that recession is not something to fear if you’re well-prepared. It can actually be an opportunity to build a stronger investment portfolio. Experienced investors know that diversification across different asset classes helps portfolios weather tough times. Recession means economic contraction, but in the long run, it’s just part of the cycle. The important thing is how we respond to it.