The interest-rate environment has become much more favorable lately for those seeking interest income on their savings. The national average yield for one-year certificates of deposit (CDs) was 2.09% in late October, according to Bankrate. Five-year Treasury bonds yielded 4.83%. Five-year AAA-rated municipal bonds traded with a tax-equivalent yield of 8.16% for someone in the highest tax bracket and subject to the 3.8% net investment income (NII) tax.

Locking in these yields could be a smart move, if they have peaked. However, yields could rise and make you wish you had waited. Such uncertainty comes with investing.

AAII contributing editor Brian Haughey provides a framework for navigating the current yield environment in his article. Rather than focusing on where rates could be headed, Haughey recommends thinking through your needs, preferences and risk tolerance. Doing so will simplify your decision process.

Here’s a simple example from Haughey’s article to illustrate this point. Suppose you will need $50,000 in 18 months to make a down payment on a house. Buying a Treasury security or a CD that matures in 18 months ensures that you will have the cash when you need it. By using either, you avoid putting your capital at risk by seeking a higher yield in an investment that could fall in value.

What if you need the money further in the future but want to avoid the volatility of growth assets? Then you have the option of buying a bond that matures in the year you will need the cash. This guarantees your return on investment, provided the bond is held to maturity, it isn’t called early and the issuer doesn’t default. Alternatively, you could create a ladder by purchasing bonds of different maturities. Doing so reduces the timing risk of fully locking in your yield now.

There are other options available to you, including Treasury inflation-protected securities (TIPS). TIPS adjust their principal with inflation, which can be advantageous if you desire protection against unexpected inflation.

In all cases, you are matching income-producing investments with your needs and tolerances rather than speculating on the direction of interest rates. This disciplined approach is an example of how we as individual investors can better manage our own portfolios.

Wishing you prosperity and good health,