It isn’t the time to ‘buy the dip’ or dump your stocks. Instead, consider your reasons for investing. With President Trump seeking to overturn decades of globalization and override the world’s trading rules, markets are in turmoil for good reason.
You’d be foolish to think nothing has changed, and you can’t just wish the turbulence away. Orderly, predictable rules of international trade are like the traffic lights of the world’s economy.
When everyone knows how the lights will work, traffic flows smoothly. When the lights morph into something like failed traffic lights, it’s understandable why investors freak out.
The Trump administration’s shifting signals about tariffs have sent stocks and bonds—and investors’ stomachs—heaving up and down.
To prevail over this chaos, you must think clearly at a time when many investors—and policymakers—are an emotional mess. Key to survival is thinking clearly—and asking the right questions.
Overview of Contents
Why Clear Thinking Is Harder—And More Important—Than Ever
In a volatile situation our brains tend to overweight the most recent events, because the older evidence could be outdated and less useful. When conditions are volatile, we may be very quick to learn, but what we’re really learning from is the short term, which may not necessarily be representative of the longer-term future.
Fear, Stress, and the Fight-or-Flight Instinct in Investing
Intense uncertainty automatically triggers fear and stress in the human brain, infusing our bodies with the ancient fight-or-flight response that is essential to survival. Fear fixates our attention on the negative, makes us acutely sensitive to social signals, impedes our working memory and impairs our ability to think flexibly.
An event unprecedented in most investors’ lifetimes, like Trump’s barrage of tariffs, intensifies our fear and stress. No one’s seen this before, so no one knows how to react to it. Trust in the system of global trade has been shattered and will require pain and patience to repair. Inflation, recession or worse could result. But positive surprises could also materialize.
No Historical Playbook for Today’s Trade War
Normally, investors can consult data from the past to put a crashing market in perspective and calm their fears. But nothing like Trump’s trade war has happened in nearly a century. This means that today’s investors “have no experience to rely on to put our minds at ease.”
While nothing is certain in the short term, a few things are highly likely in the longer term. Ultimately the costs of the tariffs will be recognized and they will be rescinded. When you look at the past, you see that eventually markets do recover, because over time logic prevails. That’s why thinking clearly right now is harder—but also more important—than ever.
Now is not the time to step on the gas by “buying the dip,” loading up on stocks whenever they slump—or to slam on the brakes by dumping all your stocks out of fear they’ll fall further.
Don’t React—Reflect: Four Questions to Ask Yourself
Q1: What Do You Own and Why Do You Own It?
The first, two-part question paraphrases an expression that the renowned former manager of the Fidelity Magellan Fund, Peter Lynch, has often used.
Meet with your financial advisers or, if you manage your own money, update your measure of how much of your portfolio is in each broad category of assets. You can’t make a reasoned decision about whether or what to sell if you don’t know exactly what and how much you own. (With the indices down more than 10% this year, you may be less overexposed than you were a few months ago. If you must panic, panic methodically.
Q2: Why Do You Own Stocks?
Before you pull any trigger, though, be sure to ask what I call the second question:
Do you own them primarily because you wanted to benefit from the stability of longstanding trade agreements in a globalized world? Probably not. Most likely, you’ve always owned stocks because you wanted to participate in the long-term growth of the India (and global) economy.
Q3: What Has Changed?
There’s no doubt that Trump’s trade moves have damaged much of the rest of the world’s trust in the U.S. Just look at how the U.S. dollar and Treasury bonds have slumped since March.
But people, companies, markets and countries are remarkably resilient. They will bounce back—although anyone who claims to know how long that will take is either a liar or a fool.
And markets might not recover on the timeline you need. Look inward: If you’re in or near retirement, you can’t wait years or possibly even decades, as full market recoveries have sometimes taken in the past. Moving equal monthly increments of your stock assets into inflation-protected bonds, which still should provide a stream of income that will stay constant despite any rises in the cost of living, can make sense.
Q4: If You Didn’t Already Own This Asset, Would You Buy It at This Price?
Beware of what behavioral economists call anchoring. That’s the tendency to measure your gains and losses against a vivid, recent reference point rather than against what matters: the price you originally paid.
Take Tata Motors, for instance. From April 2, when Trump announced his tariff plan, through April 8, the stock fell 15%; at that point, it was down 22% in 2025. But, if you’d originally bought it 5 years earlier, you still had a gain of more than 800%; if you’d bought it 3 years ago, you were still up over 60%.
Much of the pain you feel is regret over not selling at the absolute peak. Reframe your regret by measuring the latest market price against what you paid in the first place. You may find that you’re sitting on a profit, not a loss.
If you can’t answer the four questions, you have no business taking drastic actions.
The Lessons of the Small-Cap Selloff
The stock market can be a stern teacher. The recent small-cap selloff, where the BSE SmallCap Index has shed nearly 30 per cent in just six months. This dramatic decline, the second-worst in the index’s history, has left many investors nursing painful losses and questioning their investment choices.
Yet, history repeatedly shows that such despair often represents the best buying opportunities for long-term investors. What’s particularly instructive about this correction is its discriminating nature. When markets tumble, they rarely fall uniformly–they separate the wheat from the chaff, severely punishing poor-quality businesses while offering more resilient prices for quality enterprises.
Quality Always Wins in the Long Run
The data tells a compelling story. It is pertinent to observe that actively managed small-cap funds have demonstrated remarkable outperformance, with nearly all beating their benchmarks. This isn’t merely professional expertise at work but rather the triumph of a fundamental investment principle: quality investing protects capital during downturns.
Strong Fundamentals Define Resilience
What defines quality in small caps or any business? Strong growth backed by solid return metrics. High returns on equity, low leverage and consistent revenue growth are essential for any company, not just small caps. When combined, even these factors create a powerful shield against market volatility.
A Historical Pattern: Weak Fall, Strong Rebound
Perhaps most tellingly, companies that score poorly on all three metrics—the fundamentally weak businesses—have suffered the most severe declines. This pattern isn’t new. In the 2018 small-cap correction, we witnessed the same divergence, with quality small caps falling less and recovering faster and delivering superior returns over the subsequent five years.
There’s an elegant symmetry to how markets function: weak companies collapse during declines, while strong ones merely bend and bounce back stronger. This cyclical nature of market corrections creates a dual opportunity for investors—they expose weak companies to avoid while offering attractive entry points for quality businesses.
Today’s Chaos, Tomorrow’s Opportunities
The silver lining in today’s small-cap chaos is that many fundamentally sound companies are now available at compelling valuations. Businesses that were previously too expensive to consider have suddenly become approachable, with their prices discounted despite their intrinsic value remaining largely intact.
Emotional Discipline: The Key to Unlocking Value
Making sense of market corrections requires emotional discipline. When prices fall dramatically, most investors fixate on downside risk, overlooking the improved risk-reward balance that lower prices create. Yet historically, entering quality businesses during such periods has proven to be among the most rewarding investment strategies.
Consider those companies pivoting from their core business or even market leaders their segments; some of them are trading at very low P/Es. Whether this represents value or a value trap remains an open question, but the correction has made such businesses worthy of closer examination. Some of today’s most successful mid and large-cap stocks were once small caps that investors discovered during market corrections.
Final Thought: Buy Quality, Stay Patient
The current selloff presents similar opportunities for those willing to do their homework and focus on fundamentals rather than price movements. As Warren Buffett famously advised, be fearful when others are greedy and greedy when others are fearful. Today’s small-cap market exemplifies this wisdom. Long-term investors have a chance to buy quality at a discount. The rewards could be substantial for those with the patience and discernment to separate the gems from the rubble.
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