"When rates rise, new bonds offer better yields than older bonds, so the price on those old bonds needs to come down in order to find a buyer. That doesn’t matter if you own individual bonds and you hold them to maturity, but most people don’t. They own bonds through mutual funds, which not only lose value in a rising rate environment, but can get hit with redemptions, which causes a fund manager to sell into a weak market.
It can get ugly."
This is certainly true. As rates rise, the current fixed income choices such as bonds, bond funds, C/Ds. etc. will absolutely go down in value unless held to maturity. And even then, they lose because of inflation.
A bond fund manager will start to sell the 'old' bonds, and purchase new higher-yielding bonds. It may keep the income steady or increasing, but the capital appreciation will be much less than it has been in periods when rates were decreasing.
In a falling interest rate environment, such as we have had since 2008, bonds have INCREASED in price.
Then, as bonds yields increase enough to over take the risk premium that equities have, people move out of equities and into bonds. That raises the price of bonds (lowing yields, but made up by the capital appreciation) and decreases equity prices.
In a raising interest rate environment, such as we may have in 2016+, bonds will DECREASE in price.
So, a blended portfolio takes advantage of both of these scenarios. A simple look at raising and falling interest rate periods will illustrate this. It is not rocket science, and it's just as predictable as an ocean tide is.
Whether you do 60/40, 80/20, or 100% of either, the market will react with or without you. I personally doubt that the Fed can increase rates to any significant degree. We are in deflation, not inflation.
