The stock market has been sliding lower all week as the debt-ceiling standoff in Washington continues. The Dow Jones industrial average fell nearly 200 points, or 1.6 percent, on Wednesday.
Most analysts still predict that a compromise will be reached before the government defaults on its debts. But many Americans saw what happened to their retirement savings and stock portfolios in the financial crisis just three years ago. And some are getting nervous about their 401(k)s.
It's hard to miss the many dire predictions about what will happen if the U.S. actually defaults on its debt. Economists say it would be disaster. CEOs are upset and are calling upon Washington to reach a deal. President Obama said this week, "we would risk sparking a deep economic crisis."
One NPR listener wrote in to NPR.org that he's selling all of his mutual funds. But experts say that's probably not the best idea.
Advisers: Don't Panic, Stay The Course
Liz Anne Sonders, chief investment strategist for the brokerage firm Charles Schwab, says "nerves are rattled." But she adds, "our advice no matter what the crisis is not to panic."
Many top investors say that if you already have a well-thought-out, diversified retirement portfolio, the best thing to do in times of uncertainty is to stay the course.
Top investing experts, such as David Swensen, who manages Yale University's endowment, have said for years that usually, when average investors try to guess which way the market is going and "time the market", they guess wrong and do more harm than good to their savings over the long term.
Swensen says people tend to sell after stocks have already fallen pretty sharply, which is the wrong thing to do.
The Threat Of A Ratings Downgrade
Sonders says an economic calamity is unlikely. But she says there are parallel issues.
She thinks a damaging default by the government on its debt is an extremely remote possibility. Both parties in Washington say they will not let that happen.
"There's a higher potential that the U.S. gets downgraded by one or both or maybe all three of the key ratings agencies," she says.
And she says that has economic and market implications.
One fear is that a downgrade might spark a rise in interest rates. But many analysts predict that would be small and short-lived.
Most are not predicting massive disruptions, mainly because investors and financial firms have already had plenty of time to get ready for this and make adjustments.
For example, another concern voiced early on is that a ratings downgrade on U.S. Treasuries — below their longstanding AAA rating — could spark what's called "forced selling." That's a forced rush of selling by funds that have to hold only AAA securities because it's in their covenants and investment guidelines.
But financial institutions have had time now to change such requirements if they want to. And, Sonders says, it turns out that only a tiny fraction of U.S. Treasuries are held by funds that have such strict rules anyway.
The Best Lifeboat
David Glocke is a top portfolio manager at Vanguard, and oversees the firm's Prime Money Market Fund, which means he's managing more than $100 billion.
He says his funds don't have any mandates that would force him to sell Treasuries in the event of a downgrade, and even in the market overall, he says "it's hard to imagine there would be any forced selling."
Glocke says he's been doing some re-juggling of which Treasuries he's holding in his portfolio.
But he's definitely not backing away from them. Just the opposite.
"We've been adding Treasury securities," he says. "In fact, I bought more yesterday." Glocke says that's a testament to the health and strength of the U.S. Treasury.
"Where's a better place to put your money?" he says.
Glocke predicts investors around the world will stay in U.S. Treasuries because they'll still be seen as the safest, rock-solid investment around.
He says in the long term there's a risk that might change if the U.S. doesn't get its national debt under control. But not now.
Sonders agrees. She says especially with all the financial trouble in Europe, Treasuries are still the best looking lifeboat in the water.
Yes, they might get a ratings downgrade. But if you're out there swimming and you want to get in a lifeboat, she says, "it's still the one you're going to get in."