Go figure.

The

Fed

is committed to raising short-term interest rates, but long-term rates have been creeping down since early June. The yield on the 10-year note -- which peaked at 4.87% on June 14 -- fell through 4% this week for the first time since early April.

So what are individual investors to do? The experts tell us we should keep a portion of our investments in bonds to have a rock to cling to during market meltdowns like 2000-02 and 1973-74. When stocks are down 30% to 40%, boring old bonds will still be there, throwing off income.

But being a buyer of bonds in a period when the Fed is raising interest rates, as it has done three times since late June, may be asking for punishment. The price of a bond moves in the opposite direction of interest rates. For example, a $100,000, 10-year bond purchased at 4% this week will be worth about $93,000 in a year if 10-year bond rates rise to 5%.

Earlier this week, the Fed raised the federal funds rate, what banks charge one another overnight, by 0.25% for the third time this year, to 1.75%.

That means the bond you buy today, if the Fed continues to hike interest rates by year's end, will most likely be worth less in the market next year. Of course, you'll have the consolation of earning interest on your bonds, just less than what future buyers of bonds will be earning as rates rise.

Then there's the question of whether to purchase individual bonds -- such as those issued by corporations, municipalities or the federal government through the Treasury Department -- or whether to rely on bond mutual funds.

"I'm a bond expert. I don't own any individual bonds. It's too much work," says Mark Kiesel, head of the investment-grade corporate bond desk at

Pimco

, a leading manager of bond mutual funds, and portfolio manager of the

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Pimco Investment Grade Corporate Bond Fund.

Whether you buy individual securities or bond mutual funds, many financial advisers recommend keeping maturities -- the number of years before a bond is paid off -- short; less than five years, and preferably less than two or three years. That way, should interest rates continue to rise, when your bonds mature, you will have cash to buy bonds at the new, higher yields.

Kiesel says that bond mutual funds offer several advantages for investors that make annual fund fees worthwhile. (These can range from 0.2% to 1.5% and more, which at the high end can really eat into the already-limited returns that bond funds offer.)

First, the only way to get the best bid/offer spread when buying bonds is to purchase them $1 million at a time. Anything less, says Kiesel, and you're getting the more expensive bonds from the "odd-lot" desk.

Then there's the all-important matter of diversification. If you purchase anything but Treasuries, you're buying IOUs from municipalities or corporations that just might be unable to repay. With a bond fund, you have protection through diversification.

"As an individual investor," says Kiesel, "you're not going to be able to buy 200 to 400 bonds like a fund manager."

And then, of course, there's professional management. "It's very difficult for an individual to know when rates are going to rise, what part of the yield curve to be on." (The yield curve is the line tracing the relative yields of bonds over their maturities from three months to 30 years, and it varies according to current interest rates and economic conditions.)

Jack Blankinship, CFP, is a partner in the Del Mar, Calif., firm of Blankinship & Foster and was named one of the nation's Top 100 Wealth Advisers in the

Robb Report Worth's

new October issue. He typically has the portfolios of his affluent clients invested 65% in stocks and 35% in bonds, mostly through mutual funds that invest in short-term Treasuries and other short-term, fixed-income investments.

He views the bond allocation as an insurance policy. "We're not looking for income from that portion," says Blankinship. "It will do its job if it just preserves capital."

While his firm had long used

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Pimco Total Return A fund, an intermediate-term investment-grade bond fund managed by Pimco founder and bond guru Bill Gross, Blankinship has recently taken most of his client money out. He believes Gross will have trouble maintaining his outstanding record (10.07% total return between 2000-02) without taking too much risk.

"I feel very comfortable with my 2.5% to 3% average annual rate of return," he says.

The bond mutual funds his firm currently uses include

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Pimco Low Duration,

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Vanguard Short-Term Federal and

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Metropolitan West Short-Term Treasuries.

Blankinship also invests in nine-month and one-year certificates of deposit.

While bond mutual funds make sense for most people who are too busy to research and monitor a portfolio of individual bonds, some investors like to do just that, often with the help of a qualified broker.While they won't get the purchase price breaks and the diversification of a mutual fund, individual investors also won't have to pay an annual mutual fund fee after the initial broker's commission (typically 0.125% to 0.50%).

And if individual investors stick to an important rule of bond investing, they shouldn't get whipsawed by interest rate fluctuations as mutual fund investors sometimes do. The rule? Invest in a maturity that matches your need for the money.

If you need the money in five years, don't invest in a 10-year bond. In five years when you want to sell it, rates could be on the rise and your $10,000 could be worth only $9,000. But if you can wait for 10 years, and your borrower can repay, you will get your full $10,000 back, as well as the interest along the way.

It's also important to remember that short-term bonds pay less interest because investors are taking less risk than those who lend long term. They also fluctuate less in price than longer-term bonds.

Blankinship says this is a frustrating time for all investors. With the Fed tightening the monetary policy after a period of record interest rate lows, both stocks and bonds are faring poorly.

Expect overall returns of 5% to 8%, he cautions his clients, because stocks remain overvalued.

"You necessarily have to prune the tree," he says. After 20%-plus returns in the stock market in the late 1990s, he says, "Some people call it reversion to the mean, or whatever."

Kiesel of Pimco says his firm is looking to bonds outside the U.S. for better performance and he recommends that investors consider bond funds with a global reach. Two such funds are

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PIMCO Global Bond II A and

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Pimco Foreign Bond A.

Before joining TheStreet.com, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at

Ann.Perry@thestreet.com.