Conservative and concerned

DEAR HARRY: My 401(k) options were changed recently. I am very, very conservative and fearful of losing principal. I was invested in insurance contracts, but that option is no longer available. I am now in a bond mutual fund with bonds that have maximum maturity dates of six years. The problem is that the bonds are mixed Treasuries, corporate, supranational organizations and asset-backed obligations. I have recently been disturbed by commentators claiming that we're in for a bond-market crash. Could I lose my principal? I am 46 years old and intend to retire in nine years. I do not want to take any risk for a higher return. Help!

WHAT HARRY SAYS: From the beginning of the Federal Reserve rescue plan about five years ago, so-called pundits and gurus have predicted huge inflation. It has not happened. Bond interest rates have never been lower. As they rise (as they ultimately must), it will not be explosive, but slow. The only ways you could be safer would be to have your money in short-term U.S. obligations or in a money-market fund. These may not be an option for you, but it will not hurt to ask the administrator of your 401(k) to set them up. I suggest that you consider diversifying by putting some of that money into index funds. I hope you have plans for activities when you retire. I want you to wear out, not rust out.