Elm Street Group

Are bonds a portfolio's bulwark or its Achilles' heel? Investors can't seem to decide.

Over the last seven months of 2013, amid rising interest rates and falling bond prices, skittish investors yanked $18 billion more out of bond funds than they put in.

Then, as stocks faltered in the first six weeks of 2014, investors put in over $28 billion more to bond funds than they withdrew.

Adding to the confusion: Wednesday's disclosure that Federal Reserve officials are debating whether to raise interest rates sooner than expected. The yield on the 10-year U.S. Treasury hit 2.75% on the news, up from 1.62% in May. (Bond yields move in the opposite direction of prices.)

After three decades of a mostly smooth and steady bond market, investors aren't used to the recent volatility. That could be leading some to abandon their portfolios' primary defenses right when they need them the most, experts say.

"Bonds are thought of as a safe haven, but even the safest harbors have waves," says Martin Leibowitz, a managing director of research at Morgan Stanley and co-author of "Inside the Yield Book," considered by investors to be one of the best books ever written on bonds.

Like all areas of investing, the bond market is rife with popular beliefs that are only partly true at best and misleading at worst. If you want to stop lurching from one wrong-footed bond trade to another, it pays to separate myth from reality.

Here is a guide to some of the most dangerous misinformation about investing in bonds and bond funds—along with practical steps you can take to invest wisely on the basis of more-accurate evidence.

Myth No. 1: Bond investors will suffer huge losses when interest rates rise.

Long-term U.S. Treasury bonds lost 12.7% last year as rates rose roughly one percentage point. And many Wall Street strategists expect rates to climb this year as the Fed changes course.

Yet losses on that scale across a wide variety of bonds are unlikely. To see why, you need a basic understanding of what pros call "duration."

That measure—available from your fund's website or, if you buy individual bonds, from your broker—shows the approximate percentage change in the price of a bond or bond fund for an immediate one-percentage-point move in interest rates.