Four questions you should ask to combat the market chaos

Driving in my dreams on a familiar road, I approached an intersection with a stoplight whose rhythm I knew by heart. Suddenly, the drivers were lunging forward, slamming on the brakes, honking their horns, crashing into each other, swerving into the ditch. The stoplight had gone crazy: The top signal was green, the middle one black, the bottom red. Somehow, green now meant “stop," black meant “caution," red meant “go," and the signals were switching randomly back and forth as fast as strobe lights.

That’s when I woke up. Now, my old nightmare seems to have come true in the markets. The Trump administration’s shifting signals about tariffs have sent stocks and bonds—and investors’ stomachs—heaving up and down. The key to survival is thinking clearly—and asking the right questions.

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 my old nightmare, it’s understandable why investors freak out.

U.S. stocks have averaged a return of 10.3% annually over the past century. In just two days, April 3 and 4, the S&P 500 lost 10.5%. Then, on April 9, it gained 9.5%—only to dive again the next day. Days have become years.

The human brain automatically goes on red alert whenever new information is surprising. So this month’s drastic changes in market prices can make you feel you need to respond with drastic changes in your own portfolio.

“In a volatile situation our brains tend to overweight the most recent events, because the older evidence could be outdated and less useful," says Alicia Izquierdo, a neuroscientist at the University of California, Los Angeles. “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."

Now isn’t 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.

Instead, ask four questions.

The first, two-part question paraphrases an expression that the renowned former manager of the Fidelity Magellan Fund, Peter Lynch, has often used.

What do you own and why do you own it?

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 S&P 500 down more than 10% this year, you may be less overexposed than you were a few months ago.)

If you must panic, panic methodically.

Long ago, you should have set a target for how much of your portfolio you wanted in large U.S. stocks. If you’re above that threshold, rebalance by selling big U.S. stocks and spreading the proceeds across smaller U.S. companies, international stocks, bonds and other assets. Do this in your tax-advantaged retirement accounts first, to avoid triggering capital gains.

Before you pull any trigger, though, be sure to ask what I call the second question:

Why do you own stocks?

Do you own them primarily because you wanted to benefit from the stability of longstanding trade agreements between the U.S. and the rest of the world? Probably not. Most likely, you’ve always owned stocks because you wanted to participate in the long-term growth of the U.S. (and global) economy.

That leads directly to the third question:

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 U.S. 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.

Finally, ask the fourth question:

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 Apple, for instance. From April 2, when Trump announced his tariff plan, through April 8, the stock fell 23%; at that point, it was down 31% in 2025. But, if you’d originally bought it 10 years earlier, you still had a gain of more than 500%; if you’d bought it five years ago, you were still up over 160%.

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.

Write to Jason Zweig at intelligentinvestor@wsj.com