Some high-yield bond exposure may also be appropriate.
Today, Sierra's municipal bond exposure is entirely in high-yield muni funds, she said.
For those wishing to maintain bond exposure, strategic bond funds could be another solution.
Banks regularly hedge foreign exchange exposure and bond exposure by taking opposite positions to offset potential losses.
The Pimco Global Bond fund, however, leaves its foreign bond exposure unhedged and has returned 8.3percentthroughgh the second quarter this year.
The investment of Citigroup, which had hedged its bond exposure by taking out credit-default swaps, would be protected even if AbitibiBowater were forced to file for bankruptcy.
Investors seeking bond exposure should look to strategic bond funds, which can offer some shelter for capital during difficult periods if the manager makes the right calls.
A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings.
Insurers are among the main gainers, with Prudential up 55p to £11.81 and Legal and General, which on Tuesday reassured investors about its bond exposure, adding 7.5p to 209.9p.
Ms. Stevens said that if investors thought their long-term bond exposure was too high, another alternative would be funds made up of Treasury inflation-protected securities, or TIPS.
Let's compare the 60/40 stock portfolio we built above (Portfolio C) to a portfolio where we add 40 percent in bond exposure.
