Debt Crisis Survival Guide
Even if a deal is reached, America's credit rating could still be downgraded.
July 27, 2011 -- As the Treasury Department's Aug. 2 deadline to raise the debt ceiling draws near, the fear is that if a deal is not struck in the next six days, the U.S. could default on its debt.
But even if a compromise is reached, many analysts believe that credit agencies could still downgrade the U.S.'s AAA rating.
A short-term solution would likely result in a downgrade, according to Citibank, which warned its customers that "the kick the can down the road path ... would not impress the ratings agencies."
If a downgrade occurs, it could cost more to borrow, and there could be a negative effect on the markets. Analysts forecast up to a 10 percent drop in the stock market as a result of a downgrade.
How does this translate? An average 401(k) of $140,000 would lose $9,000. Mortgage rates would likely rise at least a half point. The average home loan of $172,000 would see a hike of $19,000.
ABC News spoke with four financial experts, and here are their recommendations on how to survive the debt crisis:
What advice do you have for investors?
"Investors should stay the course and not let their emotions get the better of them. Keep saving, pouring money into your IRAs and 401(ks), and stay invested in stocks. Invest for the long-term, not the next week," said Joe Magyer, senior analyst at the Motley Fool.
"You have to give some emphasis for being prepared for difficulty. That means diversification. You shouldn't bet heavily on one scenario. Don't invest heavily in situations where it's a coin toss of win or loss, big winner or big loser. Rather, invest in things that will do OK in a variety of scenarios," said Howard Marks, chairman of Oaktree Capital Management. "Invest in companies that are not highly cyclical or highly levered. Food/beverage/drugs, for instance, are inherently noncyclical industries. Auto/heavy manufacturing/paper/steel, for example, are highly cyclical industries with their fates tied to the economy."
"Nobody has a crystal ball and can predict market movements with precision. We are encouraging investors to maintain a balanced, diversified portfolio and keep a long-term perspective," advises Vanguard, America's largest 401(k) manager.
What advice do you have for investors who can't take a 10 percent hit?
"Investors can always go to cash if they're looking to avoid taking a big hit. And if you think you can't sustain more than a 10 percent loss with your assets, then you probably shouldn't be in anything where that can happen, namely the stock market," said Magyer. "I think selling now is reasonable if you can't sustain more than a 10 percent loss in the market. ... I understand why some people are concerned, the threat of a downgrade let alone a default is real and the impact will be painful, but I don't think the best play is to go completely conservative. ... I do think that blue chip stocks are the best play over the long-term for patient investors, particularly for retirees. ... The last place I'd want to be right now is a lot of the high-flying IPOs that have been out, so LinkedIn, Pandora, Zillow, each of those are ridiculously priced."
"If you are a small investor, there is absolutely nothing wrong with moving to the sidelines on a short-term basis to wait till the dust settles," said Hugh Johnson, chief economist at Johnson Advisors.
"We believe that market movements should not dictate your investment strategy. If you are nervous about the stock market and are unable to withstand a severe decline, consider selling down to the your sleeping point. In other words, adjust your stock position to a level that enables you to sleep at night, but it should be a modest (not dramatic) adjustment. But to re-emphasize, most investors should stay the course," said Vanguard.
ABC News' Dan Arnall and Jim Avila contributed to this report.