Understanding how to hedge is true stability! Debunking the myth that index investing is a guaranteed profit without loss, how should investors respond to the Taiwan Strait crisis?

Under the common belief that "buying indices guarantees profits," more and more Taiwanese investors are heavily investing in Taiwan stock ETFs like 0050. However, a post published on the X platform has sparked widespread discussion and reflection. Quantitative trader Jackson Hu bluntly stated that index investing has been overly hyped in the more than 20 years of bull markets, neglecting the potentially fatal risks posed by the Taiwan Strait crisis and geopolitical issues.

It's a bit against the tide to say this, but I must mention that index investing has been overly praised during the major long positions of the past 20 years.

If we look back over the past 100 years, there have also been several instances where the index remained unchanged for a full 10 years.

If it is an index of a single country, it is even more dangerous. As long as there is war or a significant policy error, it may be sluggish for a longer time. … pic.twitter.com/WDf6DkuYtf

— Jackson Hu (@sheng_invest) April 19, 2025

Ten years of stagnation, a sudden market crash? Historical data has long provided warnings.

Jackson Hu pointed out that if we look back over the past 100 years, stock markets in countries like the United States have experienced multiple instances of stagnation lasting up to ten years, and there have also been extreme market conditions where a single country suffered a significant index drop due to major events.

He attached a fictional chart named "SURPRISE!" in the post, where the curve continues to rise for nearly a thousand days before suddenly crashing, plummeting straight down. This is not only a visual shock of the data but also feels like a wake-up call for investors — "There are always black swans in the market."

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Is the risk of the Taiwan stock market higher? A warning bell of geopolitical tensions.

Jackson pointed out that the risks in the Taiwan market are more concentrated. If war breaks out in the Taiwan Strait, Taiwanese stocks could plummet by as much as 60%, and the over-the-counter market could fall by as much as 80%, with even the benchmark index 0050 being "useless." He reminded:

Compared to the potential drop of 30% in global stock markets, the impact on the Taiwan stock market will be catastrophic. This is not alarmist rhetoric, but rather a psychological preparation that should be made in advance.

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The Turkey Effect Hidden Concerns: Systematic Risks Easily Overlooked by Investors

The "Turkey illusion (Turkey illusion)" refers to the phenomenon where people overly rely on past experiences to predict the future, which can lead to disastrous mistakes. In the context of investing, this means that investors, having enjoyed stable returns over a long period, mistakenly believe that the future will also be smooth sailing.

Jackson warned that "Taiwan's current geopolitical risk is no less than 10%, and investors should not take the past long positions for granted." Many netizens also agree that this myth of "guaranteed profits and no losses" is masking hidden crises, especially considering that assets, jobs, and lives are all tied to Taiwan, making it difficult to effectively diversify risks.

What assets are negatively correlated with the outbreak of war in the Taiwan Strait?

If the situation in the Taiwan Strait worsens, what assets might rise against the trend? Jackson suggests including non-stock assets that have anti-inflation and hedging properties, such as:

Commodities and Energy: War may drive up the prices of crude oil and natural resources.

Cryptocurrency: Some investors view Bitcoin as a hedge asset.

Overseas real estate: Focus on geologically stable countries such as Australia or Canada.

Through the allocation of these assets, it can not only hedge against potential risks in the Taiwan market but also maintain asset resilience during global crises.

What should Taiwanese people do? Three major response strategies at a glance.

In response to the high-risk environment, Jackson and several netizens also provided concrete suggestions:

Overseas asset allocation: At least some funds should be moved to international markets to avoid putting all your eggs in one "Taiwan" basket.

Diversified investment portfolio: In addition to stocks, it includes asset classes such as real estate, commodities, bonds, and cryptocurrencies.

Immigration and contingency planning: Of course, domestic assets become meaningless after the outbreak of war. Meeting immigration requirements and having relevant contingencies will be crucial means of preserving life and wealth.

Rethink the true meaning of the word "stable".

Index investing does provide a relatively low-risk investment approach, but in the face of extreme events and high geopolitical risks, Taiwanese investors must reassess their asset structure.

The so-called "stability" is not only about stable returns but also about the "ability to allocate assets that can withstand the worst moments." When the market seems as calm as ever, it may be the best time to prepare for the future.

This article understands that risk hedging is truly stable! It debunks the myth that index investing is always profitable and loss-free. How should investors respond to the Taiwan Strait crisis? Originally appeared in Chain News ABMedia.