By John Waggoner and Sandra Block, USA TODAY

After watching stocks the past several days, you may suspect that the financial markets are run by a dozen rodeo clowns with freakish senses of humor.

By Jin Lee, AP

Traders and investors are nervous as stocks remain volatile.

The Dow Jones industrial average closed down more than 600 points Monday as markets responded to Standard & Poor’s decision to downgrade U.S. debt from AAA for the first time ever. It then jumped more than 400 points on Tuesday after the Fed said interest rates will likely remain at record lows for the next two years.

And despite the downgrade, prices of U.S. government securities keep rising, because Treasurys are still viewed by investors as safer than just about anything else.

VIDEO: Financial advisor gives tips for investors

STORY: Simple, balanced portfolio may be best during volatile times

Is there any way to make sense of this? Is there anything investors should do now? The answers: yes and yes. USA TODAY columnists John Waggoner and Sandra Block attempt to make some sense of the market’s gyrations, and what you should be doing about them.

Why is Standard & Poor’s opinion of the U.S. so important?

S&P is one of several companies recognized by the Securities and Exchange Commission as qualified to rate the creditworthiness of companies, municipalities, states and governments. (The others are Moody’s Investors Service. DBRS, A.M. Best, Fitch, Japan Credit Rating Agency, Rating and Investment Information, Egan-Jones, Realpoint and Kroll.) S&P is one of the most venerable of the ratings agencies, tracing its roots back to 1861.

Rethinking retirement?

Has the recent decline in the stock market caused you to rethink your retirement plans or your investment strategy?

Just as your credit rating determines whether anyone will lend to you, and at what interest rate, S&P’s ratings help lenders decide whether to lend to companies, states and even countries. A country with a low rating, such as Zimbabwe, may get no loans at all. Those with shaky ratings have to pay higher interest rates on their debt.

The U.S. has enjoyed an AAA rating for 70 years and, as a result, it pays extremely low interest rates. The one-month Treasury bill that matured Aug. 4, for example, paid no interest at all a huge savings for U.S. taxpayers.

How does S&P determine a country’s creditworthiness?

Several ways. One is the amount of debt, relative to a country’s national income, or annual gross domestic product. Just as a person with a $210,000 income can handle a $100,000 30-year mortgage, a country with a $1 trillion GDP can handle $500 billion in debt. Other factors:

Monetary policy. A country that just prints more money to pay its debts runs the risk of inflation, which means creditors get repaid in currency that’s worth less and less. Countries that keep relatively tight monetary policy get higher grades from rating agencies.

Fiscal policy. Unlike families struggling with bills, countries can raise their income by levying more taxes. They can also cut spending. Neither one is attractive to politicians, but a country with the ability to adjust its spending and taxing according to current conditions tends to get higher marks than one that can’t.

Economic strength. Countries with only one major export, such as copper, are far more vulnerable to economic turndowns than those with vibrant, flexible economies.

Who else has AAA ratings?

The U.S. still has an AAA rating from Moody’s and Fitch, which reaffirmed those ratings when the debt deal became law. Other countries that have an AAA rating: Switzerland, Singapore, Germany, Sweden, Denmark, Canada, Norway, United Kingdom. Finland, Austria, France, New Zealand. Australia.

How will the downgrade affect rates on consumer loans?

Rates for 30-year fixed-rate mortgages tend to track the 10-year Treasury note. If Treasury rates rise, mortgage rates will also increase, inflicting further damage on an already-fragile housing market.

So far, that hasn’t happened. Monday, the yield on the 10-year Treasury note fell to 2.34% from 2.57% on Friday.

LendingTree, a mortgage comparison website, says lenders that participate in its network were offering 30-year mortgages for as low as 4.125% on Monday. Still, if you’re planning to buy a home or refinance, it probably wouldn’t hurt to lock in a rate, since they’re unlikely to fall much more.

Should I move into bonds?

You have bonds for stability and diversification, says Kathy Jones, fixed income specialist at discount brokerage Charles Schwab. When stocks go down, bonds do well it’s the sleep-at-night position you have in your life.

Moving all your money into bonds now probably won’t get you clobbered, but you won’t make a lot of money, either. The two-year Treasury note yields just 0.24%. That’s saying, ‘Take my money for two years, just promise me I’ll get it all back,’ says Dean Popplewell, chief currency strategist at OANDA, a currency trading firm.

If you must look at bonds, Jones says, consider high-quality corporate bonds. Corporate balance sheets are in good shape, and you’ll get a bit higher interest than on Treasuries. Avoid bonds issued by banks; many are still weak.

Is this a buying opportunity?

Possibly. Selling has been widespread, and some good stocks have gotten hammered. If a person has got some money, now is a better time (to buy) than a week or two ago, says Greg Womack of Womack Investment Advisers.

People near retirement probably have been defensive since 2008 and have had money on the sidelines because they’ve been nervous. This would be a good time for them to get back into the market, says Lydia Sheckels, a Philadelphia financial planner.

But go cautiously. People make reactions based upon short-term news, and studies have shown that they usually make the wrong decisions, says Scott Hanson, financial adviser at Hanson McClain Advisors. What’s important now is for investors to take a good look at their time horizon, at how long they have to let their money grow.

And keep a long-term outlook. You need to be able to hold and not sell, says Howard Silverblatt, senior index analyst for S&P. Stocks have good underlying fundamentals, he says, but the market has no upward momentum and no industry leadership. Still, dividend-paying stocks in the S&P 500 have a yield of 2.5%, making them attractive, especially compared with Treasuries.

Should I rebalance my portfolio?

Rebalancing means setting a target level for different broad types of investments: stocks, bonds and money funds. You might decide that you want 60% of your money in stocks, 30% in bonds and 10% in cash. A big market meltdown can knock your portfolio out of balance say, 50% stocks, 40% bonds, 10% cash. To rebalance, you sell enough bonds to bring your portfolio back to your intended allocations.

But it’s bad to make decisions based on short-term market gyrations. People saving for retirement need to focus on trying to remain practical, rational and unemotional, says Sheryl Garrett of the Garrett Planning Network.

That said, consider the past week a good test of your tolerance for volatility. If you’re losing sleep and experiencing heart palpitations, you may want to lighten up on your investments in stocks, Garrett says. Just be prepared to save more and work longer, she adds, because it’s tough to stay ahead of inflation without investing in stocks.

Now is a good time to open your 401(k) statement, look at it and ask, Where am I and where do I want to be? says Bill Ebsworth, chief investment officer for Fidelity Strategic Advisers. It’s a gut check. How comfortable are you with stock volatility?

And if I hold cash?

You won’t make any money. The average money market mutual fund yields 0.01%, says iMoneyNet. Many yield nothing. You might get 2% interest or a bit more if you invest in a five-year bank CD, but then you’ll be tying up your money for half a decade with very little interest. While money funds and CDs are very safe, they don’t protect you from inflation, now 3.6%.

Contributing: Christine Dugas

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