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Investors don't know what to do about rising rates

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While most investors realize interest rates are going to keep rising, far fewer know what to do about it.

A recent survey by financial services provider Edward Jones shows about two-thirds of Americans "don't know" how rising rates will affect their portfolios, while a quarter feel "completely in the dark."

With a decidedly shifting landscape ahead, such confusion can be the breeding ground for catastrophic investing errors.

"It's something that financial advisors need to spend more time with their clients educating them on," said Tom Kersting, fixed income strategist at Edward Jones. "Over the longer term rates are likely to continue rising from here as the economy continues to improve and as the Fed begins to step away from many of its policies."

Indeed, financial markets have been rattled this year by the prospect that the Federal Reserve will begin withdrawing from its $85 billion-a-month bond-buying program and, at some point after that process is completed, start raising its key policy rate.

(Read more: Why tapering talk may be a 'temporary sideshow')

In anticipation of that, the benchmark 10-year Treasury yield has risen half a point over the past few months and money has begun to drain from bond funds. Fixed income bond funds have taken in on net less than $1 billion this year, while exchange-traded funds have brought in just $8.2 billion.

The implications are important.

As the Fed kept its funds rate near zero, investors went searching for yield in junk bonds and longer-term debt.

That mentality has to change, Kersting said, with investors needing to have multiple duration levels in their fixed income holdings.

(Read more: Keep printing? Fed stays in game, but exit looms)

"What we've been communicating to our advisors and clients is to make sure you have a properly laddered portfolio," he said. "Many clients were stretching for yield a bit in the lower-rate environment, probably buying too many long-term bonds. Certainly in a rising rate environment you don't want to" do that.

Rising rates erode capital value of fixed income, creating a difficult dichotomy for investors to navigate.

Results from the Edward Jones survey show just how deeply investor confusion runs.

One-third of the 1,008 respondents between the ages of 18 and 34 said they have "no idea" how the changing rate environment will impact their investments.

While understanding grew in older age groups, fully 63 percent said they don't know how higher rates will affect investment portfolios such as 401(k) plans, pensions and individual retirement accounts.

(Read more: Is 'chaos' ahead? Some truths about Fed policy)

Edward Jones has cut its long-term allocation in fixed-income portfolios from 35 percent to 25 percent.

Kersting said clients are far more worried about why the value of their bonds are going down than the machinations of Fed policy.

"We certainly think bonds still play a very important role in clients' portfolios," he said. "They act as a good diversifier and a good complement to stocks. It's walking a delicate line to make sure people understand the risks of bonds and not overweight long-term bonds, but also make sure they own bonds."

By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

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