How to Fix Your Bond Mix

If the Federal Reserve raises interest rates later this year to keep the economy from overheating, hip, hip hooray, right? That means the Great Recession really is in our rearview mirror. But harrumph might be the more appropriate response from many current or soon-to-be retirees, who could see the prices of their fixed-income holdings slump as a result.

Investors put more than $356 billion into fixed-income mutual funds last year, over 10 times as much as in 2008. But higher interest rates go with lower bond prices. And for most investors, who tend to own bond funds rather than hold individual bonds to maturity, lower prices can foreshadow losses. "If the Federal Reserve raises rates," New York University economics professor Ann Lee explains, "that signals a recovery is under way"—bullish for stocks, bearish for bonds. It's scary for older Americans who, to reduce risk, typically invest heavily in fixed-income assets.