Understanding Recession and Tips to Safeguard Your Portfolio During Economic Contraction

Investors often focus on economic growth, but in reality, periods of economic slowdown and recession(recession) serve as true tests that reveal the strength of your investment portfolio. These economic crises may seem frightening, but for those who understand the game and are well-prepared, they present golden opportunities that many miss.

What Does Recession Mean and Why Is It Important to Learn About It

Recession is a period when overall economic activity contracts significantly and lasts for a considerable time. The National Bureau of Economic Research (NBER) of the United States defines a recession as occurring when economic decline persists for at least 2 quarters(6 months).

Indicators of recession are often observed through variables such as GDP, personal income, employment rate, industrial production, and retail sales. If the economy does not grow continuously for more than 3 years and GDP declines by more than 10%, it is classified as a depression, which is much more severe than a recession.

Historical records show that since independence, the US has experienced over 48 recessions, with the most significant being the Great Depression(1929-1939), which lasted over 10 years with extremely high unemployment.

Root Causes: Why Do Recessions Occur

Recessions do not stem from a single cause; economists continue to study various factors:

Cost factors such as the oil crisis from the 1950s to 1970s caused soaring prices, leading to severe inflation, shrinking purchasing power, and economic downturns.

Government measures to control inflation like raising interest rates to curb money supply expansion can slow consumption. If this halts abruptly, it can trigger a recession.

Asset bubbles in the mid-2000s saw housing prices soar to 220 in 2006-2007 from 140 in 2000, coupled with risky financial instruments. When the bubble burst, both real and financial economies collapsed.

External demand slowdown affects countries heavily reliant on exports, such as Germany or Japan. When major trading partners like the US or China contract, these economies are pulled down, and the recession quickly spreads globally.

Government Interventions: The Last 3 Recessions in the US

( Dot-com Bubble )March-November 2001###

Tech companies experienced a bubble burst, with the NASDAQ100 index dropping from 4,861 to 850(down 82%). After 9/11, the Federal Reserve cut interest rates from 6.5% to 1% in 2003. This recession lasted only 8 months, with GDP shrinking by just 0.3%.

Unemployment rate surged to 6.3%.

(Great Recession )December 2007-June 2009###

This time, the impact was twice as severe. The housing bubble burst coincided with a financial crisis, with GDP contracting by 5.1%, marking a severe downturn lasting 18 months.

The Federal Reserve implemented quantitative easing (QE) by injecting over $1.75 trillion, lowering interest rates close to zero, and conducting two additional QE rounds in 2010 and 2012 to recover.

Unemployment peaked at 10%. The effects spilled over into the Eurozone.

(COVID-19 Crisis )February-April 2020(

The shortest period, just 2 months, but GDP contracted by as much as 19.2%. Unemployment rose from 3.5% in February to a peak of 14.7% in late 2021.

The Federal Reserve launched QE4, expanding its balance sheet from $4.1 trillion to nearly $9 trillion. Interest rates remained near 0.25% until March 2022, while the government rolled out massive stimulus packages.

How Do Assets React During Economic Pain

A recession typically signals risk-off sentiment: investors sell stocks for cash and turn to “safe assets.”

During the COVID event within a few months:

• Dow Jones: fell 38.4% from a high of 29,568 to 18,213
• Crude oil: dropped nearly 98% from )per barrel### to below (- Gold: rose 32% from $1,567 to $2,067 per ounce
• US 10-year Treasury bonds: yields decreased by 80% from 1.67% to 0.32% as investors flocked to buy

In most cases, gold, government bonds, and hard currencies)such as the US dollar( provide stable returns. However, during COVID, the dollar’s value declined by up to 13.5% due to massive money printing.

Okay, What Should You Do When You See Warning Signs

) ❌ Mistakenly, investors should avoid

Increase risk assets — as recession approaches, downside risks rise. Currently, the risk is in housing.

Take on high debt — although recessions often present opportunities to buy stocks at lower prices, high debt can hinder movement, as income goes toward interest payments, leaving less for investments.

Variable interest rate loans (ARM) — during early recession, interest rates are low temporarily. When the economy recovers, rates rise, increasing borrowing costs.

$54 ✅ Strategies to Consider

Switch to safe assets — gold, bonds, cash to reduce risk.

Secure stable income — regular employment, freelance work, or consistent income streams to have cash flow for buying undervalued stocks during market downturns.

Lock in fixed interest rates $1 FRM( — lock in low interest rates during recession, which is ideal for reducing borrowing costs, securing low rates for the duration of the loan.

Summary: Recession Is Not Just an Event, But a Game

Economic growth is familiar to most investors, but a recession is actually a test. Recession is not an enemy; it is a friend for those who are prepared.

Forecasting recessions is difficult, but well-read investors should make their portfolios flexible and diversify across various asset classes. For those with a plan, recession is not an accident but a golden opportunity to rejuvenate and grow their investment portfolios in the coming years.