Retail Investors Fear Crashes, the Wealthy Wait for Them: The Underlying Logic of 5 Things That Make the Rich Richer in a Crash

The market is limit-down, your phone screen is full of red, and what is your first reaction? Sell, run, don’t look back.

But have you ever thought that, in that exact same second, the truly wealthy are doing the complete opposite — they are buying.

This is the cruelest wall between retail and wealthy, not the gap in capital, not the gap in information, it is the gap in mindset. Retail investors fear crashes, the wealthy wait for crashes. This sounds harsh, but it is true.

Core idea: A market crash is not the end — it is the starting point of a wealth redistribution. There is only one question — which side are you on?

Why 90% of Retail Investors Actually Lose Money in Down Markets

According to TWSE statistics, Taiwan’s retail investors’ actual selling ratio during major market corrections is far higher than that of institutional investors. In other words, retail investors sell on the way down, and chase on the way up. This is not an exception — it is the behavioral pattern of the majority.

Why? Because your brain is designed for survival, not for investing. Seeing paper losses, your brain sends the same signal as when you face danger — run. This mechanism saved your life in primitive times, but in capital markets it is killing your wealth over and over again.

The wealthy are not free of this mechanism — they have just trained a decision-making system that overrides the instinct. That is what we are going to break down into the 5 things — not secrets, not insider information, just the underlying logic no one has explained to you properly.

Thing 1: They Already Loaded Their Bullets Before the Crash

What were many Taiwan retail investors doing at the market peak? Fully invested, paper profits, buying more, even buying on margin. But the truly rich, when the market is hottest, actually start trimming and holding cash. This is not bearishness — it is basic asset allocation discipline.

According to SITCA data, institutional cash positions around market highs are often more than double those of retail investors. They hold cash not because they are bearish, but because they know cash during a crash is worth far more than the compounding on the page.

Here is a blind spot many Taiwan bloggers don’t explain clearly: cash is not a zero-return asset, it is the only tool that lets you actively strike during extreme market volatility.

In March 2020, the Taiwan market fell from around 11,000 to 8,500 in a single month, a drop of more than 22%. Every dollar the cash holders deployed nearly doubled in value over the next year. The fully-invested could only watch — or panic-sell at the bottom.

You can ask yourself right now: does your current portfolio have a dedicated reserve for adding during a market crash? If not, you have no business talking about going against the tide.

Load your bullets before the crash

Thing 2: What They Buy Is Different From What You Buy

What do retail investors sell most during a crash? The very stocks they chased at the high — the ones friends mentioned, the news hyped, the ones that were hot online. Drop 30% and they can’t hold, drop 50% and they really can’t hold, so they sell again.

What do the wealthy buy during a crash? They buy core assets with pricing power, stable cash flow, and the ability to keep operating in any market environment. In the language of the Taiwan market, that means ETFs tracking the Taiwan Weighted Index, high-dividend ETFs, or leading companies with durable competitive advantages.

Let me run a clear account: the true cost of the first group’s wrong approach — suppose near the 19,000 high of the 2021 Taiwan market you put NT $500, 000 inba t c h es in t o a f e w h o t co n ce pt s t oc k s a tt h e t im e . B y t h ee n d o f 2022 t h e T ai w anma r k e t ha dd r o pp e d t o a r o u n d 12, 600. I f t h oses t oc k s f e l l in l in e w i t h t h e in d e x, y o u r N T$ 500,000 was down to NT $330, 000— a p a p er l osso f N T$ 170,000. But the problem isn’t only the paper loss; many people couldn’t hold through half of that and sold out, locking in an actual loss of perhaps NT$200,000–300,000. This is a real loss, not a paper number.

The result of the second group’s right approach — same NT $500, 000, b u t y o u s t a g e d y o u r e n t r y in t o a T ai w an 50 E T F d u r in g t h e 2022 cor r ec t i o n t o t h e 12, 000-13, 000 z o n e . B y 2024, t h e T ai w anma r k e t b r o k e 22, 000, an d t h er e t u r n o n t hi s in v es t m e n tw a sr o ug h l y * * 60$ 500,000 growing to NT$800,000–850,000. But there is a prerequisite that must be made clear: you must have the discipline to buy in batches during the most panicked moments, not go all-in at once, and not wait for even lower levels — most people cannot do this. That is the real challenge.

The third group’s long-term wealth gap — if from 2004 you invested NT $120, 000 p er y e a r in t o a T ai w an 50 E T F, b y 2024 t h ec u m u l a t i v e 20 - y e a r co n t r ib u t i o ni s N T$ 2.4 million, but according to historical backtesting the actual asset size is roughly **NT $6-7.5 mi l l i o n * *, n o t y e t in c l u d in g t h eco m p o u n d in g e f f ec t o f r e in v es t e dd i v i d e n d s . B u t y o u ha v e t o k n o w t h e w or s t c a se : in t h e 2008 g l o ba l f inan c ia l cr i s i s, t h e T ai w anW e i g h t e d I n d e x^{'} s ma x im u m d r a w d o w n e x cee d e d 55$ 1 million in all at once at the end of 2007, by early 2009 the account would have been down to about NT$450,000, and you would have had to wait until 2011 to get back to cost. This is the worst-case scenario — you have to ask yourself: can you handle it?

Core assets vs hot stocks comparison

Thing 3: What They Do in a Crash Is Called Rebalancing, Not Bottom-Fishing

Many people hear that the wealthy buy in a crash and assume it means betting on the bottom. This is the biggest misunderstanding. Top-tier asset management logic is never about guessing the bottom, it is about executing disciplined asset rebalancing.

What is rebalancing? The standard definition used in Taiwan’s financial regulator and academic circles: rebalancing is the regular — or threshold-triggered — adjustment of buying and selling to bring the portfolio back to its original target asset allocation when the proportions drift from the preset target.

In plain language: suppose your original allocation is 60% stocks, 40% bonds or time deposits. After a big market drop, the equity share falls to 50%. You take money from the bond side and buy stocks, restoring the ratio to 60:40. What is the essence of this action? It is to passively and disciplined-ly buy more stocks when the market is cheap. No need to guess the bottom, no need for technical analysis, no need to listen to influencers.

That is the real logic behind the wealthy adding in a crash — not betting, but discipline.

Many Taiwan retail investors can’t take this step for one reason: they never set a target asset allocation in advance, so when the crash comes they don’t know how much to buy or what to buy, and they fall back on feeling. Feeling is panic, panic is selling.

Many assume rebalancing is something only the wealthy can do because they have surplus funds. But Taiwan’s labor pension self-selection platform, as well as DCA services offered by many investment trust companies, actually have built-in rebalancing-like mechanisms, with entry thresholds as low as NT$3,000 a month. The issue is not whether you have money, it is whether you designed your allocation architecture in advance.

Thing 4: Their Mindset Is Not Optimism, It Is Deep Understanding of Market Cycles

Have you ever met someone who, every time the market crashes, doesn’t panic and even says ‘this is normal, it’ll be fine in a moment’? You assume they are naturally optimistic. They aren’t — they really understand the historical cycles of the Taiwan market.

Here are some real Taiwan-specific data points:

The Taiwan Weighted Index crashed from the 1990 historical high of 12,682 to 2,485 in October 1990, a drop of more than 80% — but by 2021 it broke 18,000
The 2000 tech bubble saw the Taiwan market fall from 10,393 to 3,411 in 2001, a 67% drop — but it still came back
The 2008 global financial crisis saw the Taiwan market fall to a low of 3,955, but by 2024 it had broken 22,000

Every crash, in hindsight, was a buying opportunity. But in the moment of every crash, everyone feels this time is different, this time is really the end. That feeling is human instinct — it is not your fault. But if you don’t actively learn the history of market cycles, you will repeat the same wrong decision at every crash.

The Taiwan Weighted Index has delivered an annualized return of roughly 5% to 8% over the past 30 years. That figure is not a guess — it is a historical record. But you can only capture that return if you hold long-term and don’t cut at the bottom.

Market cycles and historical numbers

Thing 5: They Use Crashes for Tax and Cost Optimization

This is something 90% of Taiwan’s retail investors have no concept of at all.

Taiwan currently levies a securities transaction tax on individual investors’ stock trades, not a capital gains tax — this is a special feature of the Taiwan market. But if you invest in offshore funds or overseas ETFs, the tax structure is completely different, including the calculation of overseas income under the Alternative Minimum Tax (AMT), something many Taiwanese investors haven’t sorted out in advance.

More importantly, in a crash there is a legitimate operation called tax-loss harvesting — selling at a paper loss and immediately repurchasing a similar asset. In Taiwan’s tax environment, this action has tax implications for specific investment vehicles, but the applicability varies by individual — it is strongly recommended to consult a Taiwan-licensed tax advisor, do not do it on your own.

The core idea is: a crash is not just an opportunity to buy, it is also a chance to reorganize your portfolio structure and reduce your cost basis. Most retail investors only see the panic in a crash, not this layer.

4 Iron Rules: Non-Negotiable Principles in a Crash

If you violate any one of these, you absolutely cannot move:

Until your emergency reserve is fully funded, you cannot use any excuse to add to a crashing market. The standard is 3–6 months of your personal living expenses in a savings account or money market fund, untouched. This rule applies to everyone.
If you are investing with borrowed money, personal loans, or margin, in a crash you cannot add — you can only consider trimming. Investing with borrowed money means your risk tolerance is zero, and any further drop will force a margin call, with no room to maneuver. There are no exceptions to this rule.
If you have bought something you don’t fully understand (including structured products, leveraged ETFs, inverse ETFs), you cannot add based on feeling in a crash. These instruments have their own design logic and long-term decay characteristics that are completely different from ordinary ETFs — if you don’t understand them, don’t touch them.
If you have a clear large capital need in the next 1–3 years (e.g., a down payment, children’s education, retirement), that money cannot be used for any crash-buying operation. No matter how cheap it gets, money that doesn’t have time on its side is not investing money.

4 Action Steps

Open your online banking or brokerage app, add up all your investment accounts, calculate what percentage of your total assets is in stocks, funds, and ETFs, and what percentage is in cash and time deposits. Write that number down — it is your starting point.
Set your target asset allocation based on your age and risk tolerance: ages 20–35 can hold 70–80% in equities, with 20–30% in cash and fixed income; ages 35–50 with family obligations, equities 50–60%; ages 50+ approaching retirement, equities no more than 40%.
Set your rebalancing conditions: the simplest is once every six months or once a year. If any category drifts from the target by more than a certain percentage (e.g., 5–10 percentage points), rebalance.
Set your crash-buying reserve: in addition to your emergency fund, set aside another dedicated pool for adding during major market corrections. Keep this money in highly liquid instruments (e.g., Taiwan money market funds or savings), and when the market sees a correction of more than 20%, deploy it in three to five batches, one to two months apart — don’t go all-in at once.

2 Taiwan-Specific Advanced Traps

The first: Taiwan’s labor pension self-selection platform is a severely underutilized crash-response tool. The Labor Pension Act allows workers to choose their own labor pension fund investment portfolio, but according to the Ministry of Labor, the share of Taiwanese workers who choose self-selection is extremely low. When a crash hits, if you are using the self-selection option, you can adjust the equity-to-conservative ratio on the platform. This is a fully legal, government-regulated investment account, and your employer is also contributing to it. Most people completely ignore it. Long-term, this account accumulates a meaningful amount, and because of its retirement-account nature, it forces you to hold for the long term — which actually helps you avoid the short-term in-and-out mistakes retail investors most commonly make.

The second: The intersection of Taiwan high-dividend ETF ex-dividend cycles and crash timing. Many high-dividend ETFs in Taiwan ex-dividend in specific months each year. If you chase in at the high just before ex-dividend, the price drops after ex-dividend, and the dividend you receive is effectively taken out of your principal, plus it is taxable as income. If a crash coincides with a post-ex-dividend low, that is actually a lower-cost entry point. But you have to understand the ex-dividend cycle and distribution policy of the ETF you are buying — don’t just look at yield, look at total return.

Contingency Plan for Extreme Conditions

If Taiwan’s market experiences a systemic crash like 2008, with a drawdown exceeding 40% and lasting more than a year, what should you do?

Don’t go all-in at once — buy in batches, one to two months apart, at least three tranches.
If your work income is affected, prioritize protecting cash flow. Investing can pause, but don’t be forced to sell at the low because you need cash.
If your paper losses are so severe you can’t sleep or your daily life is affected, that means your risk tolerance and your position size are mismatched. At that point, the right move is to reduce the position to a level you can accept, not to tough it out. Investing is a long-term endeavor; your physical and mental health is the most important asset.

Final Words for You

When you’re not sure whether the market will go up or down, the only thing you need to be sure of is: is your system strong enough to keep you from making the wrong decision in any market condition?

Retail investors sell in crashes because they haven’t loaded their bullets, haven’t designed an allocation, don’t have rebalancing discipline, don’t understand market cycles, and don’t see the cost-optimization opportunity behind the crash.

The 5 things the wealthy do rely on no inside information and no privilege — they are systems you can start building today.

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