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 default on its debt.

Economists say a default could create a credit crisis similar to what happened after Lehman Brothers went bankrupt in 2008, causing interest rates to rise and harming the economy. But the reaction in the stock and bond markets had been muted before Monday.

So, despite some concern, Wall Street appears to think a deal will be struck in time. But the alarming headlines are causing investors to ask whether they need to change their portfolios.

Here are five things to keep in mind:

1. Don't abandon your long-term 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. "Don't get waffled around emotionally by all of this short-term noise," said Michael Farr, chief investment officer of Farr, Miller & Washington, an investment firm in Washington, D.C.

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2. Be wary of bonds • Conservative investors who seek to avoid the volatility of the stock market and flock into bonds could get burned.

A default could drive up the cost of government borrowing for years 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.

If you want to position yourself for an impasse on the debt ceiling, consider Treasury bills with a maturity of six months or less. Look for those maturing sometime after August. Their short-term nature means their prices are less affected by an increase in interest rates. Investors should also steer clear of Treasury notes with a maturity of 10 years or longer because their prices may face steep price declines as interest rates climb.

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3. Remember that rebalancing 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 nervous investors. But you should weigh the repercussions.

If you pull money out of stocks now, you could miss a "relief rally" if the market climbs after a last-minute debt deal. Even if you're correct, and move your money before a decline in the market, you'll need to get the timing right a second time when you shift back into stocks.

If you have only a year until retirement or you find yourself fretting over your potential losses, playing it cautious may make sense.

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4. Check your emergency preparedness • In a period of uncertainty, it's important to make sure you have access to cash. Investors should set aside money for emergencies in an easily accessible account, such as a money-market savings account. It's important not to have this money in an investment account because market volatility could leave you unprotected.

Ideally, a single-earner family should have enough cash set aside to cover six months or more of living expenses. A two-income family should have at least three to six months' worth.

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5. Watch for buying and selling opportunities • This is a good time to remember Warren Buffett's famous advice: "Be fearful when others are greedy, and be greedy when others are fearful." As more fear creeps into the market with the deadline approaching, it may be a prime time to snap up bargain stocks.

If steep cuts to government spending are part of an agreement on the debt ceiling debate, keep in mind the specific industries that could be hurt the most. Goldman Sachs recently listed companies that generate at least 20 percent of their revenue from government. Many are in the health-care sector, both providers and equipment suppliers, plus defense contractors.

During the debt standoff, investors should look for higher yields. In particular, the stocks of large companies are paying investors an average of 2 percent annually; high-yield corporate bonds are paying an average of 7.26 percent, said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank. —

Related developments

The bitter debate in Washington about the country's looming borrowing limit crisis has raised the prospect that the U.S. will default on its enormous debt, but foreign investors don't seem too concerned. They bought $38 billion in U.S. government debt in May, increasing their holdings 0.6 percent to $4.51 trillion.

Europe's banking troubles and an impasse over lifting the U.S. government's borrowing limit helped drag down stock markets. Gold rose above $1,600 an ounce as investors sought safe places to park money. The S&P 500 index dropped 0.8 percent, while the Dow Jones industrial average and Nasdaq composite index gave up their gains for the month.