Sokol has about three-quarters of his individual retirement account invested in bond funds through Fidelity Investments and said he's sticking with that allocation for now. Last year his bond funds returned 6 percent, or more than he could earn from certificates of deposit. CDs are time deposits with banks that generally offer higher interest rates than savings accounts and are insured by the Federal Deposit Insurance Corporation.

Coupon Payments

The Fidelity Total Bond Fund, which Sokol was invested in as of August, may lose 1.4 percent if interest rates rise 0.25 percentage point. He also put money in the Metropolitan West Low Duration Bond Fund, which may lose 0.46 percent under the same scenario, according to data compiled by Bloomberg.

Losses from bond funds going forward may be worse than at other points in history when interest rates rose, such as in 1994 or the late 1970s, said Ken Volpert, principal and head of taxable bonds for Valley Forge, Pennsylvania-based Vanguard Group Inc. Beginning in 1977, long-term government bonds saw five straight years of losses of as much as 14.5 percent when adjusted for inflation, Morningstar data show.

Euro Crisis

In previous periods, yields were higher, about 6 percent or 7 percent, said Volpert, who manages about $375 billion. That meant investors received higher coupon payments to offset price declines, he said. Yields in bond funds are so low today that rates don't have to increase much before investors would see negative returns, he said.

A 10-year Treasury is yielding about 1.75 percent. If yields rise to 2.75 percent, investors would lose about 7.5 percent total return not adjusted for inflation, Volpert said.

"We've been in a period of continuously declining interest rates and positive price returns," Volpert said. "Going forward, what has been a tailwind in terms of performance because yields have been declining will become a headwind."

Smith, the retired attorney, says he's not ready to go back into equities. Europe's sovereign-debt crisis could cause more instability, even though stocks have performed well recently, he said. His conservative strategy has resulted in an 11 percent gain since 2010.

Looking Forward

"They've performed quite well," Miriam Sjoblom, associate director of fund analysis at Morningstar, said of bond funds. "If people are just looking at historical returns and are expecting to get the same returns, they might be disappointed."