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Prepare your portfolio for more volatility

Market volatility has reappeared and if the whipsaw has scared you, it may be time to re-evaluate your portfolio.

Last week, U.S. stocks closed sharply lower, with the three major indexes posting their worst day since June 24, when U.K. ballot results showed voters had approved leaving the European Union. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 40 percent.

Markets recovered Monday after the signs that the Fed will likely not raise rates at next week's meeting.

Asset allocation

If you have a financial plan you are comfortable with, stick with it, advisors say.

"I very much doubt that that the outcome for anyone with a reasonably well-constructed portfolio will be determined by the next interest rate hike," said David Mendels, director of planning at Creative Financial Concepts in New York. "Far more harm has been done to portfolios by trying to time the next rate hike than will be done by missing that call."

Though if you are concerned about rising rates, here's what financial advisors say you should keep in mind:

Bonds

Managing the fixed-income portion of your portfolio in a rising-rate environment is a delicate balancing act, said Elliot Herman, a certified financial planner with PRW Wealth Management in Quincy, Massachusetts.

Herman recommends investors hold floating-rate bonds and short-term bonds that mature less than a year because they tend to be less sensitive to rising rates than bonds of longer durations.

Of course, bonds with durations longer than a year will fall in value as rates rise.

"It seems we've been telling clients that rates are going higher forever, advising clients to stay short duration," said Amy Hubble, a certified financial planner with Radix Financial in Oklahoma City. "Fixed income investors are going to begin to see their long-term bond prices plummet and need to be emotionally prepared for their portfolios to lose market value."

As rates rise, it might be better to hold individual bonds instead of bond mutual funds, said James Shagawat, a certified financial planner with the Baron Financial Group in Fair Lawn, New Jersey.

"With individual bonds, you have more control over interest-rate risk," Shagawat said. "In a bond mutual fund, you're invested in a pool of bonds with no set maturity date, which means more risk if interest rates rise."

Stocks

Investors hungry for yield have flocked to dividend-paying stocks, which have generally performed well in rising-rate environments.

It's easy to see the appeal of dividend payers. The average stock on the S&P 500 stock index has a dividend yield of about 2 percent whereas the 10-year Treasury note yields 1.7 percent.

When it comes to dividend-paying stocks, it's important for investors to understand the company's ability to continue payouts, said Hank Mulvihill, a certified financial planner in Richardson, Texas.

For example, telecom and utilities stocks have lagged recently and pose a risk to investors because of their highly leveraged balance sheets, said Eric Ervin, CEO of Reality Shares, which sponsors four exchange-traded funds of dividend-paying stocks.

"If interest rates rise, this will further impact their earnings power, and therefore, their ability to pay dividends," Ervin said.