Today’s clients shouldn’t follow the philosophy of investing in bonds that served their parents well, warned a Wells Fargo investment manager.

Since the early 1980s, an entire generation of investors safely and profitably built their bond portfolios with a mixture of maturities based on sustained declining rates, said Ron Florance, deputy chief investment officer at Wells Fargo Wealth Management.

But with interest rates on the verge of rising for a long time, Florance said a significant change in strategy is called for.

“The last generation managed duration risk. The new generation will manage credit risk,” he said during an American Bankers Association webinar today.

By managing credit risk, Florance said, investors are going to have to get away from of buying and holding bonds to maturity and instead actively manage their holdings to take into account the way the market will react to changes in inflation, interest rate, default, upgrade and downgrade risk.

Like with other investments, the bond market can over react to some developments, with other investors able to profit by staying calm, he noted.

While rising interest rates can cause holdings to lose value, he cautioned investors against throwing out bonds completely in a moment of anxiety because bonds can be good sources of liquidity, cash flow and diversity.

Retail investors shouldn’t be scared away from municipals as an investment type because of Detroit’s bankruptcy, he added.

”The default rate of the municipal bond market is stunningly low. The sky fell in Detroit but not the general municipal market,” Florance said.

He advised that investors considering municipals should look for stable revenue sources that pay off the bonds through revenues sources such as water and sewer levies.

“Regardless of economic activity, people are going to drink water and flush toilets, he said.

Florance said interest rates are likely to rise as the Fed ends its moves to keep rates low as a means of stimulating the economy. Two other factors pushing rates up are increasing inflation expectations and sustainable economic growth, he said.

But he cautioned that even if the Fed begins to ease its massive buying of debt, short-term rates will not increase for many years. Investors should be prepared for a longer-term trend of rising interest rates with more volatility, he said.

Investors should diversify with high-yield bonds, including floating rate notes, high-interest corporate debt and high-yield municipal bonds, he said.

“A combined high-yield approach offer the most diversification and income generation with measured risk,” he said.

Preferred stocks, real estate investment trusts (REITS) and master limited partnerships will be providing more attractive income streams over dividend-paying stocks for some investors, he said.