• Bonds add diversification
  to your portfolio. Many investors added bonds to their
  portfolios in the aftermath of the recent stock market declines.
  However, all investments move in cycles, with bonds now poised
  to decrease in value when interest rates increase. The whole
  point of diversification is to hold a mix of investments so when
  one investment type is declining, other investments will help
  offset those declines. Historically, stocks and bonds have a
  low positive correlation with each other.
  
  
  
  


• Bonds offer fixed,
  periodic interest payments and your principal's return at maturity.
  Thus,
  even if current bond values decline, you receive some return
  in the form of interest payments and the return of your entire
  principal at maturity.
  
  
  
  


• Bonds are often better
  suited for short- and medium-term financial goals. If you need your
  money in the next few years, you may not want to keep those funds
  invested in stocks, since a major stock decline could occur when
  you need the money

Rather than selling all your bonds, look
for strategies to use in a rising interest rate environment. Some
strategies to consider include:

• Use a bond ladder. A bond ladder is a portfolio of bonds of similar
  amounts maturing in several different years. When one of the
  bonds matures, the principal is reinvested in another bond at
  the bond ladder's longest maturity. By spreading out maturity
  dates, you lessen the impact of interest rate changes. Holding
  the bond until maturity prevents interest rate changes from resulting
  in a loss when you sell the bond. Since your bonds mature every
  year or so, your principal is reinvested over a period of time
  instead of in one lump sum. If interest rates rise, you have
  principal maturing every year or so to reinvest at higher rates.
  In a declining interest rate environment, you have some funds
  in longer-term bonds with higher interest rates. But the main
  advantage is you don't continue to hold only short-term bonds
  while you wait for interest rates to peak, an event that is difficult
  to predict.
  
  
  
  


• Consider a bond swap. A bond swap is simply the sale of one bond and
  the purchase of another. A rate anticipation swap is made to
  take advantage of changes in market interest rates. It typically
  involves swapping short- for long-term bonds or vice versa, depending
  on your beliefs about the future direction of interest rates.
  When you anticipate interest rates might increase, you might
  swap out of longer-term bonds into short-term bonds. Then, when
  interest rates do increase, you will have funds available to
  invest at the higher rates. Before executing a rate anticipation
  swap, make sure you understand all costs that will be incurred
  and whether the sale of your existing bond will result in a taxable
  gain or loss.
  
  
  
  


• Invest in short- or
  intermediate-term bonds. When interest rates rise, bond values
  decrease the most for long-term bonds, since they have a long
  stream of interest payments that do not match current interest
  rates. Thus, for new bond purchases, you may want to shorten
  your maturity dates in the near term until rates stabilize at
  higher levels.
  
  
  
  


• Compare all types of
  bonds before investing. If you have a bond maturing, don't
  just reinvest in the same type of bond without taking a look
  at other alternatives. For example, lately the spread between
  corporate and municipal bonds is very small, making municipal
  bonds an attractive alternative for investors in higher tax brackets.