But are bonds really that safe?

You can lose money in the safest of bonds, even U.S. Treasury bonds and general obligation municipal bonds.

I'm not talking about the potential for the world's debt problems leading to governments collapsing and failing to pay interest. Rather, I'm referring to the way people usually lose money in safe bonds, even when the government keeps paying interest as promised.

The way you lose is this: Rising interest rates poison the value of existing bonds. So when interest rates start rising, the bonds with low interest rates you bought recently will probably be worth less than now. That's because another investor won't want to buy your bond, which maybe is paying 3 percent, when that same individual can buy a similar new bond paying 4 percent. So if you want to sell your bond, you will lose money.

Keep in mind: You don't have to worry if you plan to hold on to an individual bond until it matures. You will keep getting interest payments like always, and when your bond matures you will get back your principal, or the original money you put into the bond. The only downside: If serious inflation kicks in, the low interest you have settled for today won't seem like much if prices rise for everything.

Although individual Treasurys are safe if held to maturity, bond funds can be riskier. Your fund could be loaded with low-interest bonds. So if interest rates rise, those bonds will lose value, and you will, too, as your mutual fund shares decline.

Bond fund managers try to mitigate the risks by buying a variety of bonds, but anyone can have trouble in a rising rate environment. This is important for retirees needing access to bond funds for income but less important to younger people saving for retirement, because with time a fund adjusts to higher rates.

Because interest rates are so unusually low at the moment given recession threats, financial advisers have been warning people to prepare for the possibility of higher rates in the future. The Leuthold Group said that although you would have made about 13 percent on 20-year Treasurys this year, that would turn into almost an 8 percent loss over the next 12 months if yields rise to 4.75 percent from the recent 3.7 percent.

Here's what advisers suggest.

BEWARE LONG-TERM: Although investors can pick up some extra yield by buying bonds that mature in more than 10 years, Envision Capital Management President Marilyn Cohen suggests concentrating on those that mature in five years or less. Bonds that mature quickly suffer more modest losses than those that mature in many years.

To cut risks, she said individuals could construct what's called a bond ladder, with a bond maturing in one year, another in two, another in three, another in four and so on. That way if interest rates go up, one of your bonds will mature each year and can be reinvested at a higher interest rate.

BLEND APPROACH: For clients who do not want to risk losing money, Atherton Trust Chief Executive Kraig Kast said his firm goes beyond the safest of bonds to create a variety that should hold up in different interest rate environments.

For example, he said, about 12 percent of a conservative portfolio would go into preferred stocks and solid common stocks paying a high dividend. About 35 percent would go into corporate bonds for companies rated A or above by rating firms. With both stocks and corporate bonds, the firm concentrates on companies that make products people need regardless of the economy such as Procter & Gamble, or food producer Archer Daniels Midland.

With about 29 percent in state and local municipal bonds, Kast concentrates on essential services like sewer and water. Most of the U.S. Treasurys in the portfolio mature in five years or less. For clients "scared to death about inflation," he chooses some Treasury Inflation-Protected Securities, or TIPS, although they currently pay little interest.

KNOW THE RISKS: To increase yields, some investors put money into high-yield bond funds, but they are considered similar in risk to stocks. Cohen said high-yield bonds have become so popular, they are not paying enough to compensate investors for the risks they will be taking if the economy goes back into a recession.

Yet in small doses, Cohen noted, adding some riskier bonds to portfolios could be OK. He said 401(k) investors do this when they choose a well-diversified bond fund.

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