When the economy grows, it’s like a sailboat moving forward. But when a recession occurs, everything slows down. The hoped-for profits disappear—and this is something investors need to understand well.

What is a recession? In fact, this term refers to a broad contraction of the economy. Over a fairly reasonable period of time, economists often look at two consecutive quarters of decline. But if it drags on for more than 3 years and GDP falls by more than 10%, it’s called a depression—something far worse than a recession by nature.

The United States has experienced more than 48 recessions since independence. The worst was the Great Depression in 1929, which lasted more than 10 years, leading to widespread unemployment, a slump in production, and a severe contraction in consumption.

So what causes a recession? It can come from many sources. Sometimes it’s due to changes in the production costs of goods—such as the oil crises in the 1950s and 1970s—which caused prices to surge. Inflation then follows, and people’s purchasing power shrinks. Sometimes it happens because of government measures that try to control inflation, which results in consumption slowing down. And sometimes it stems from the accumulation of massive debt—like in 2007, when asset prices rose sharply, but debt grew so much that people could no longer repay it.

Looking at more recent history, since 2000, the United States has gone through 3 recessions. The first was the Dot-Com Recession in 2001, which lasted only 8 months. The NASDAQ index fell by more than 82%. The 9/11 events also increased risk, but the economy recovered fairly quickly.

However, the Great Recession of 2007-2009 was much worse. It lasted 18 months, GDP fell by 5.1%, and unemployment surged to 10%. It was caused by a financial crisis that began with speculation in real estate. Home prices rose from 140 in 2000 to 220 in 2006-2007. New financial instruments used mortgage-backed assets as collateral. When home prices fell, the damage spread everywhere. The central bank had to carry out QE of more than $1.75 trillion and cut interest rates to nearly zero.

Then came the COVID-19 Recession in 2020—the fastest on record—lasting only 2 months, but also the worst. GDP fell by 19.2%, and unemployment surged to 14.7%. Both demand and supply contracted. The government and central banks had to intervene again with QE, with the central bank’s balance sheet jumping from $4.1 trillion to nearly $9 trillion.

When a recession occurs, asset prices often move in a risk-off direction. Investors sell stocks for cash and shift into safer assets such as gold and bonds. This seems reasonable, but it doesn’t always work out. During COVID-19, the Dow Jones fell by 38.4%, oil dropped by nearly 98%, gold rose by 32%, and the yield on 10-year bonds decreased. But the U.S. dollar—regarded as safe—posted a negative return of -13.5% because of QE.

For investors, recessions are difficult to predict, but there are ways to prepare. What you should not do is increase investment in risky assets, take on high levels of debt, or borrow with floating interest rates—because when the economy recovers, interest rates will rise, and you may not be able to repay.

What you should do is shift to safer assets, hold onto stable income sources to keep investing when prices are low. And if you need to borrow, choose fixed interest rates—this way, you can lock in a low rate during a recession.

What is a recession? In fact, it’s a period that tests the resilience of your investment portfolio. For investors who have prepared, it’s not a time of hardship—it’s an opportunity to collect good assets at lower prices. Diversification and planning ahead are the keys to long-term growth.