Q: Recent headlines have fueled worries about imminent increases in interest rates, the growing threat of inflation, and the likely negative impact for bond investors.  Should we get out of bonds before rates rise?

A:  These stories likely place too much emphasis on short-term predictions and serve only as a distraction from what is really important.  It is hard to argue against rates going up eventually; they are at or near historic lows currently.  If and when rates do go up, the prices of existing bonds will go down, hurting short-term performance.  For investors who reinvest income and replace bonds as they mature—or for those who own bond funds which do the same—higher interest rates are actually good news.  Higher rates mean new bonds added to a portfolio or fund will provide higher yields.  Over time, the effect of compounding income—earning interest on interest—at increasingly higher yields should more than compensate for the initial price decline.