Since the Great Recession, many investors' portfolios have been a tale of feast and famine. Stocks have racked up hefty gains, while the lowest interest rates in a generation have meant paltry returns on bonds, cash accounts and other fixed-income investments.

Now, income investors are facing a sea change. With the U.S. economy rolling along, the Federal Reserve has pushed its benchmark short-term interest rate to a range of 1.5% to 1.75%--the highest since 2008--and has signaled more hikes to come. Longer-term rates have also risen, though modestly so far. Although the prospect of earning higher yields will appeal to many investors, rising rates also pose a threat in the near term: They devalue older, lower-yielding bonds, as well as some stocks and other securities that rise and fall largely in tandem with the fixed-income market. Inflation, which is starting to creep upward, is another threat.

All of this means investors may need to rethink what they want the income portion of their nest egg to look like and how much risk they're willing to take compared with the potential reward. To that end, there's one basic concept every bond investor needs to know: duration. It's roughly related to a bond's maturity, or the average maturity of the bonds in a fund's portfolio. Duration tells you approximately how much the price of a bond, or a fund's share price, would fall or rise depending on the direction of interest rates. A duration of 5.5, for example, implies a fund's share price would fall roughly 5.5% if market rates rose one percentage point over a 12-month period. High durations often go hand-in-hand with higher yields, but also with greater potential share price volatility. It's the trade-off every fixed-income investor has to make.

Short-Term Accounts

Illustration by Mathieu Persan

Thanks to the Fed, cash is no longer trash. Yields on short-term fixed-income accounts and securities--typically meaning those maturing in one year or less--have tracked the Fed's key rate and now are mostly between 1% and 2%. And note: If the Fed sticks with its rate-hike plan, yields on bank savings deposits, money market funds, U.S. Treasury bills and other short-term accounts could be 1.25 points higher by the end of 2019 than they are today.

The risks: There is little to no risk of principal loss on most