How to Navigate the Bond Market in 2011

Treasury yields have recently moved higher, shaking up some investors.

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[See 5 Foreign Bond Funds for Yield-Hungry Investors.]

Build a laddered portfolio. Cohen recommends individual bonds because they can be held to maturity, so investors are guaranteed to get their principal back. (In bond funds, the principal isn't guaranteed because the bonds aren't held to maturity.) But picking and choosing individual bonds can be time-consuming and expensive. Cohen points to some relatively new exchange-traded fund offerings, the Guggenheim BulletShares Corporate Bond ETFs, which allow investors to purchase a diversified mix of bonds that have similar maturity dates instead of selecting individual bonds. The seven funds hold bonds with maturity dates from 2011 through 2017. (For example, the bonds for Guggenheim BulletShares Corporate Bond 2011 all expire in 2011.) Cohen says the Guggenheim ETFs can be used as a part of a laddered approach, in which investors buy a range of bonds with different maturity dates to guard against interest rate and credit risk.

Add some stocks to the mix. Stocks are inherently riskier than bonds, but experts say investors should consider carving out a spot in their portfolio for dividend-paying stocks. Generally, these are stocks of well-established companies whose dividend payouts can provide a cushion in down markets. Experts are predicting that 2011 will be a good year for large-cap stocks, following the S&P 500's double-digit rally in 2010. In addition, the 372 dividend-paying stocks in the S&P 500 are yielding an average of 2.19 percent, according to Howard Silverblatt, senior index analyst at Standard & Poor's.

"You're giving up a little bit as far as the yield, but you're picking up significantly much more upside potential, obviously, with equities than with fixed-income at this juncture," Hviid says. "If yields rise, odds are they rise because the economies is doing better and inflation expectations are rising, which tends to favor equities."

With reporting from Meg Handley.