How investors can prepare for possible financial crisis

CHICAGO -- How do you prepare for a financial cataclysm that may not happen?

That's the question facing investors as an Aug. 2 deadline approaches for Washington to raise the government's borrowing limit or risk a U.S. default on its debt. Economists said a default could create a credit crisis, causing interest rates to rise and harming the economy.

Here are four things to keep in mind.

1. Stick to your plan

Most investors who had diversified portfolios in 2008 and stuck with them have made up their losses, despite a 57 percent drop in the Standard & Poor's 500 from its peak in October 2007 to the market bottom in March 2009.

Investors who panicked and withdrew their money from the stock market have found it tougher to recover.

2. Be wary of bonds

Conservative investors who sought to avoid the volatility of the stock market and flocked into bonds could get burned.

A default could drive up the cost of government borrowing for years to come and lead to higher interest rates for everyone else. If that happens, bonds would lose value because their prices move in the opposite direction of interest rates.

3. A shift can be risky

Adjusting your 401(k) retirement plan to shift money out of the stock market and into cash is always an option for a nervous investors. But you should weigh the repercussions first. If you pull money out of stocks now, you could miss a "relief rally" if the market climbs after a last-minute debt deal.

4. Have access to cash

In a period of uncertainty, it's important to make sure you have access to cash in case of an emergency.