If you've been biding your time, thinking you had until mid-2015 before the big bond squeeze, the last four months were a preview of how costly that strategy can be.
The four-week moving average in muni bond fund outflows reached $1.6 billion in August, according to Lipper data. The losses in the most famous bond fund of all, Pimco's Total Return Fund (including outflows and price declines) totaled $7.7 billion in August, according to Morningstar. And, it's possible we haven't seen the worst of it yet.
So what can you do to manage your own bond portfolio amid the bond exodus? Here are 10 dos and don'ts to preserve, protect and profit in today's volatile debt markets.
1. Don't reach for yield, capital preservation is key
When you lose your principal, it takes twice as long to crawl back to even, and in the meantime, you might have to eat cat food to make ends meet. Remember that 10 percent return on $100,000 is $10,000, whereas 10 percent return on $50,000 is only $5,000. A 10 percent return is the average return for bonds over the last 30 years, according to Morningstar.
As interest rates rise, that is ultimately good news for fixed income, provided you have capital to invest. The Cash King will be first in line for the best offerings. The bond exodus victim will still be in the hospital, trying to recover. So, staying safe and liquid, even with a zero return on investment, is better than being vulnerable and at risk of capital loss, for a measly 4 to 5 percent return on investment. Amass dry powder for a better bond day.
2. Don't confuse duration rotation with rotation into stocks
Sophisticated bond investors are rotating out of long term, high yield and muni bond funds and into shorter duration, higher creditworthy bonds and funds. And into cash. There has not been a great rotation into equities—yet. People relying upon a fixed income are aware that stocks are too volatile to be a safe haven from the bond exodus.
(Read more: Investors confused on reaction to bond rates)
3. Don't invest in the next Stockton, Calif.
Your bond is less likely to be devalued with next year's model (higher yield) if the company or issuer has a smarter business plan than borrowing from Peter to pay Paul. Know the revenue source that secures your loan and yield, and limit the time period that you have to endure record-low interest rates. Stockton pension bondholders are fighting to receive pennies on the dollar. Limit your exposure to higher risk, longer-term bonds and funds now.
4. Don't overuse bond funds
Bond funds can be traded in a nanosecond, and they offer no maturity date. That's the beauty and the poison of funds. The exodus can be swift and shocking for those standing on the sidelines. Bond funds should be selected carefully and represent only a small portion of your diversified fixed income portfolio.
5. Don't steer clear of overseas debt because of emerging markets panic
Chile and Australia are two low-debt countries with strong economies and higher interest rates than the U.S. Concerns over China have taken emerging markets out of favor, however, don't throw these babies out with the BRIC bath water. Creditworthy bonds in Chile and Australia, particularly when these countries become oversold (as Chile might currently be) could provide extra protection and ROI.
(Read more: US isn't the 'place to be' for investors?)
6. Don't go with any one "great" bond idea
Even corporations with investment-grade ratings (remember Enron and Lehman Brothers) can offer coal in the stocking. Whatever great idea you have to survive the bond exodus should still be only a slice—10 percent or less—of your total fixed income allocation.
7. Do five minutes of research, it's well worth it
A friend, who asked me to look at her bonds with her, had holdings in an energy corporation that is going to be mothballing a nuclear power plant—to the tune of $800 million to a billion dollars—potentially twice as much as the company has in its decommissioning fund. It took less than five minutes to discover this. What meltdowns are hiding in your nest egg? It will pay to know this now, while there is still time to protect your investment portfolio.
8. Do pay attention to the history of the Fed
On Aug. 30, 2013, I interviewed Kathy Jones, vice president, fixed income strategist, Schwab Center for Financial Research. She'd been staying up late, reading Fed minutes dating back to 1918, and had discovered some interesting things.
The period of the 1940s and 1950s was the only time in history (that she discovered) where the Fed's balance sheet was 20 percent of GDP. During that period, the Feds tried to raise rates, and the economy slid back into a mild recession. According to Jones, "Even though short-term rates had gone up to about 1.5 percent, it took 18 years from the low for long-term rates to go back to where they were before this maneuver."
What's interesting about this comparison is that it describes what happened in the European Union over the last few years. If Kathy's correlation proves prescient, and a low interest rate environment persists, income-producing hard assets will be the best strategy, as will protecting yourself from the stampedes in and out of bond funds.
(Read more: It's year-end financial planning season)
9. Do invest in hard assets
Hard assets outperform paper assets in periods of inflation. The traditional favorite would be income property, particularly at today's low interest rates. However, don't overlook the value of less typical hard assets. Investing in energy efficiency upgrades, for example, could reduce your costs by $4,000 or more each year. That's equivalent to an 8 percent return on a $50,000 investment.
Why include hard assets in an article on fixed income? When bonds are vulnerable and you are not getting rewarded for risk, it could be easier to earn a steady income, and have a chance of increased value, in carefully selected income property and residential energy efficiency upgrades. An investment in reducing or eliminating your electric and gasoline costs equates to money in your own pocket, potentially for the rest of your life.
When bonds are vulnerable to both interest and credit risk, with a very low yield relative to the capital exposure, getting creative about fixed income and capital preservation will generate the best return.
10. Don't take anyone else's advice (over your own)
Are you relying upon the recommendations of a friend or a relative? Is the expert managing your portfolio really worthy of blind faith? As TD Ameritrade Chairman Joe Moglia always says, "No one cares about your money more than you do." Take your job, as the CEO of your life and your money, seriously. You're the boss. The experts ultimately answer to you, and it's only you who loses if they don't perform.
—By Natalie Pace, Special to CNBC.com.