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July 28, 2011, 12:01 a.m. EDT
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” Watching the stock market and the economy these days is a bit like watching the calm scenes in a horror movie. Feeling like something bad is about to happen, you struggle with the varying instincts to avert your eyes or run away or to sit still and watch what happens next.
A U.S. debt downgrade could be a tough blow for the still-healing municipal bond market.
Just like any good horror movie, you can never quite tell when the scary stuff will happen, when the villain or bad guy is going to start slashing and the blood will start spurting.
Clearly, many investors think the horrible part is, in market terms, just a moment away, that we're a day or two from having not just a bad day, but a "black day," the kind that lives in infamy.
They have good reason for their fears. Even if the debt-ceiling issue is resolved on time and without any stoppage in government activity or temporary default on Treasury securities, the rumors and rhetoric flying around right now are enough to shake markets, to push the pros to the limits where they push buttons on the kind of big, save-me moves that trigger massive market swings.
Inherently, average investors do seem to realize that no one has ever looked back on one of those black days two or three decades later and said "I could have retired if only I missed that one day in the market." But that's not much comfort when you think you are about to watch a stock market axe murder. While it's possible the current controversy will amount to the biggest non-event to hit the market since Y2K, financial advisers and money managers acknowledge that the investing public is so nervous that some people will be moved to do the wrong thing.
If a black day is coming, you don't want it to be your worst day as an investor. Here are some things to do that financial advisers believe will help you sit through the gory ending to the current crisis, no matter how it turns out.
Experts love to say that you should never blow up your investment strategy in response to a short-term problem. But the current situation has long-term implications, so if you are nervous because you are not sure your investments are right for your situation, do something.
"This could be a cataclysm, or it could be a fantastic non-event, but if you are really retching over this then I would suggest that the real problem is not the big picture but your small picture, and what you are doing in your portfolio," said Michael S. Falk of Michael S. Falk Asset Consulting in Chicago. "If that's the case, you might want to make changes, but not because of what is happening in the headlines but rather because your portfolio is not really right for you in these times."
If you need money for short- and medium-term goals "” say anything within five years "” it needs to be invested in something that won't swing wildly over that period. Some experts have said that it's fine to keep a cash stash as a safety net, just in cash the system freezes up.
You're not sacrificing much yield in going that route, though most folks will be more comfortable with bank deposits. While money-market mutual funds and short-term bond funds are typically appropriate for this job, if the debt-ceiling crisis makes you lose sleep on those kinds of safe harbors, then sticking with the banks is appropriate.
You don't have the government's leeway to act irresponsibly with money, so if the current situation makes you nervous it probably makes sense to set aside more than you might otherwise hold out for a rainy day. While most financial advisers suggest having three to six months of living expenses in a safe place, some are now suggesting doubling that cushion, if it's possible.
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund... Expand
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons. Collapse
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