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."