Actually, recession is a matter that investors need to understand deeply because it can significantly impact our portfolios. I see many people panic when they hear this term, but what exactly is a recession, and how should we prepare?

Let's understand the basics first: a recession is a broad slowdown in economic activity over a prolonged period. Generally, economists look at the number of quarters with negative GDP. If it’s negative for two or more quarters, it’s considered a recession. The NBER office in the U.S. defines it as a significant decline in broad economic activity lasting at least 2 quarters or 6 months, based on factors like GDP, income, employment, production, and retail sales.

The causes of a recession are varied; it’s not just one thing. Sometimes it results from an oil crisis, sometimes from real estate speculation, sometimes from uncontrolled credit expansion, or even unexpected events like a pandemic. A recession in one country can spread to others, especially if it occurs in major economies like the United States.

Looking at U.S. history since 2000, there have been three major crises. The first was the dot-com bubble burst in 2001, which lasted only 8 months, with GDP shrinking by 0.3%, and unemployment rising to 6.3%. It was caused by tech speculation and the 9/11 attacks, making it a relatively mild recession.

The second was the Great Recession from 2007 to 2009, a major event lasting 18 months, with GDP contracting by 5.1%, and unemployment rising to 10%. It stemmed from a financial crisis caused by real estate speculation, with home prices rising from 140 in 2000 to 220 in 2006-2007. When prices fell, the financial instruments weren’t well diversified, leading to significant damage. The Federal Reserve responded with over $1.75 trillion in QE and near-zero interest rates.

The third was the COVID-19 recession in 2020, the fastest on record, lasting just 2 months (February-April 2020), but with the most severe impact—GDP fell by 19.2%, and unemployment rose to 14.7%. It was caused by travel and production shutdowns. The Fed and government intervened with QE4 and economic stimulus packages.

During recessions, risky assets tend to fall sharply. For example, during COVID, the Dow Jones dropped 38.40%, oil nearly 98% to close near $1 per barrel, while gold rose 32%. U.S. 10-year bonds’ yields fell 80% (meaning prices increased as investors flocked to safe assets). These are risk-off movements where investors avoid risky assets and turn to safe havens.

For investors, a recession is a time to stay calm and disciplined. There are some things you should avoid doing. First, don’t increase investments in risky assets because the risk is much higher during a recession, and the chance of loss is greater. Second, avoid taking on high levels of debt; a recession is an opportunity to buy good assets at lower prices, but if you have high debt, your income should go toward paying it off first, missing out on that opportunity. Third, avoid floating-rate loans (ARM) because initially, the government lowers interest rates during a recession, but as the economy recovers, rates rise, increasing borrowing costs beyond your ability to pay.

What should you do instead? First, shift investments into safe assets like gold and bonds to protect your portfolio. Second, secure a stable income source, such as a regular job, to have cash to buy good assets at lower prices during a recession. Third, if you need to borrow, choose fixed-rate loans (FRM) so you know exactly how much you’ll pay throughout the loan term.

Finally, a recession isn’t necessarily a scary time if you’re prepared. Experienced investors know that recessions will come, and they always keep their portfolios ready. For those who prepare well, a recession isn’t a crisis but an opportunity to buy good assets at low prices and hold them long-term.