Washington, D.C. © Corbis

Washington's government shutdown is threatening to morph into something far worse -- a government debt default that some believe could plunge the nation into a crippling depression.

For ordinary Americans, the consequences likely would mean a bear market in stocks, a possible interruption of government payments such as Social Security and Medicare reimbursements, and substantial losses in bonds, where mom-and-pop investors have piled the vast majority of their cash over the past decade.

Of course, reality is likely to be something less extreme though still disruptive.

Financial pros say now's a good time to think about portfolio protection, risk and the lessons we have -- and have not -- learned since the financial crisis devastation.

"People need on an individual basis to continuously reduce their personal levels of debt," said Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "People today for the most part don't have adequate short-term buckets to move through stuff like the things going on in Washington."

Casserly and other financial pros said investor action in the wake of a potential default should break down into five areas: 1) Holding adequate cash levels; 2) not panicking; 3) rebalancing; 4) taking a global investment perspective; and 5) buying downside portfolio protection.

Six months of cash not cutting it?

For generations, the baseline for financial advisors was that clients should hold four to six months of cash to brace against unforeseen crises.

Casserly said she thinks the new paradigm could be twice that -- or more.

"Is six months enough? These cycles last much longer now. The average debt crisis takes a decade to clear out of the system. We had the worst ever, so it's going to take more than a decade," she said. "I'm really wanting people to have somewhere between like nine to 15 months."

In event of a default, the government could end up having to prioritize which bills it pays and programs it funds with whatever cash it has on hand. Transfer payments likely would have a high priority, but the uncertainty serves as a reminder of how important cash is in a post-crisis dysfunctional-Washington world.

"I'm still shocked at how numb people are to having high debt levels," Casserly said.

Keep calm and carry on

Well-known banking analyst Dick Bove at Rafferty Capital Markets expects a debt default to lead to a full-blown depression that could take decades to recover from, and it's a scenario that can't be dismissed.

However, few analysts or economists believe even the current batch of Washington warriors would allow a default to happen.

Making rash investing decisions based on scary headlines, then, could have severe consequences.

"Investors should not panic and should stay the course, remaining focused on their strategic asset allocations," Ashvin Chhabra, chief investment officer at Merrill Lynch Wealth Management, said in a report for clients.

He added: "We urge investors to distinguish between political posturing that may lead to short-term market volatility and those decisions that may have implications for long-term returns."

Jonathan Corpina, Meridian Equity Partners, weighs in on how the shutdown is impacting the markets.

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