Updated 28 July 2011

Remember the days after Lehman fell? That same shock wave couldripple again.

That’s what economists and Federal Reserve Chairman Ben Bernankewarn if Washington doesn’t raise the borrowing limit before Aug. 2and risks a U.S. default on its debt.

Bernanke told the Senate Banking Committee a debt default wouldbe “a calamitous outcome," according to a July 14 Reuters report. "It would create a very severefinancial shock that would have effects not only on the U.S.economy, but the global economy."

To thwart a looming default, House Republicans offered a plan(the Cut, Cap, and Balance Act) that would require disciplinedspending and a balanced-budget amendment in exchangefor bumping up the nation’s debt ceiling. That plan wasdead in the water, according to reports that PresidentObama was prepared to veto the measure based on its cuts tofederal programs. But the House passed it anyway.

Then, there were rumors the president planned to throwsupport behind the framework of a “Gang of Six” proposal that callsfor a combination of tax reform and spending cuts. But there’sworry that “the plan by the Senate's so-called bipartisan Gang ofSix is far too complicated and contentious to advance before anAug. 2 deadline to avoid a default that Treasury Secretary TimothyGeithner and other experts warn would rattle markets, drive upinterest rates and threaten to take the country back into arecession,” writes Andrew Taylor for AP.

Cut, Cap and Balance moved to the Senate. And it didn't goanywhere.

When it was clear Democratic leaders weren't going tobudge on a balanced-budget amendment and sharp immediate cuts tofederal programs, and GOP members wouldn't accept taxincreases, two rival plans emerged from House SpeakerJohn Boehner and Senate Democratic leader Harry Reid that cateredto both chambers' concessions.

Both plans tout more than $1 trillion in domestic cuts before2021, and both won't touch taxes.

Still, stock markets this week showed investors getting nervousover the stalled negotiations, with only a slight uptick onThursday based on the latest unemployment report.

So how do you prepare for a financial cataclysm that may or maynot happen? AP personal finance writer Dave Carpenter reports thatwhile headlines have been alarming, Wall Street seems to think adeal will be reached in time, because “reaction inthe stock and bond markets has been muted.“

"The Dow Jones industrial average closed at 12,479 last week,about where it stood at the start of the month,” Carpenterwrites.

Nevertheless, Carpenter lists five things investorsshould keep in mind if they're worried about a default:

1. Don't abandon your long-term plan.

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

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

"Don't get waffled around emotionally by all of this short-termnoise," says Michael Farr, chief investment officer of Farr, Miller& Washington, an investment firm in Washington, D.C.

2. Be wary of bonds.

Traders work in the bond pit at the Chicago Board of Trade.(AP Photo/Michael S. Green)

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

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

Even a brief default could be enough to hurt the credit ratingof U.S. debt and usher in an era of higher interest rates, cautionsGreg McBride, senior financial analyst for Bankrate.com.

If you want to position yourself for an impasse on the debtceiling, consider Treasury bills with a maturity of six months orless. Look for those maturing sometime after August. Theirshort-term nature means their prices are less affected by anincrease in interest rates. That's because investors will receivetheir principal investment before there are larger changes in theeconomy. Investors should also steer clear of Treasury notes with amaturity of 10 years or longer because their prices may face steepprice declines as interest rates climb. Bank CDs are anotheroption, although the yields are minuscule.

3. Remember that rebalancing can be risky.

Judy and Bob Dienell review their financial statements. (APPhoto/John Amis)

Adjusting your 401(k) retirement plan to shift money out of thestock market and into cash is always an option for a nervousinvestors. But you should weigh the repercussions first.

If you pull money out of stocks now, you could miss a "reliefrally" if the market climbs after a last-minute debt deal. Even ifyou'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 shiftback into stocks. Otherwise, there's a good chance you'll findyourself on the sidelines when market momentum shifts.

If you have only a year until retirement or you find yourselffretting over your potential losses, playing it cautious may makesense.

"Pull back a little for peace of mind if you're really worried,"says Tom Root, associate professor of finance and business at DrakeUniversity. "But if you have a long-term plan, stay with it."

4. Check your emergency preparedness.

In a period of uncertainty, it's important to make sure you haveaccess to cash in case of an emergency. Investors should set asidemoney for emergencies in an easily accessible account, like amoney-market savings account. It's important not to have this moneyin an investment account because market volatility could leave youunprotected.

Ideally, a single-earner family should have enough cash setaside to cover six months or more of living expenses. A two-incomefamily should have at least three to six months' worth, says JustinSinnott, a financial consultant for Charles Schwab Corp. inSeattle.

5. Watch for buying and selling opportunities.

(AP Photo/Paul White)

This is a good time to remember Warren Buffett's famous advice:"Be fearful when others are greedy, and be greedy when others arefearful." As more fear creeps into the market with the deadlineapproaching, it may be a prime time to snap up bargain stocks.

And if steep cuts to government spending are part of anagreement on the debt ceiling, keep in mind the specific industriesthat could be hurt the most.

Goldman Sachs issued a note to investors last week listingcompanies that generate at least 20 percent of their revenue fromgovernment. Many are in the health care sector, both providers andequipment suppliers, plus defense contractors.

The turbulent market in the last three years has caused manyinvestors to be overly cautious, says Erik Davidson, deputy chiefinvestment officer for Wells Fargo Private Bank.

During the debt standoff, he says, investors should look forhigher yields. In particular, the stocks of large companies arepaying investors an average of 2 percent annually, and high-yieldcorporate bonds, which are paying an average of 7.26 percent.