A friend of mine had invested in a bond fund a few years ago that, on average, had produced annual historical returns in excess of 12 per cent. She had gotten accustomed to that level of return and had no reason to expect it would not continue.

However, during 2015, amidst the Greek debt crisis, the decline in commodity prices and the anticipation of a rise in US interest rates, bond prices had softened and there was an increase in volatility. As a result the fund did not repeat its stellar performance.

She was quite upset when her statement revealed that the value of her investment was lower than the last time she checked it and called her investment advisor to find out the reason. Her advisor explained the factors that were causing the decline in the prices of bonds and therefore lowering the price per unit used to value her investment. He also reminded her that with mutual funds, bonds, and equities, you are not losing money unless you sell your holdings at the depressed prices. Until then it is just an unrealised loss and not an actual loss.

However she could not get the idea out of her head that she was losing. Mind you, my friend had to date withdrawn more money than she had even invested in the fund, and the units she still held at the time were worth a considerable figure, even with the decline in their recent decline in value.

Between the funds she had encashed and the value of her existing units she had earned returns of over 50% over the life of her investment! Yet she admits that she repeatedly called her advisor to insist that she was losing money.

No matter how many times he reassured my friend that she was not losing money and that her investment was profitable, reminding her that the returns from mutual funds are not guaranteed — there will be good years and bad years, and that based on market analysis the fund would make a recovery; she was not convinced.

While my friend was telling me this story she kept referring to the returns she used to get and what she was used to earning and I was reminded of the book

Who Moved My Cheese?

For the benefit of those who have not read that book, it is a light hearted parable about the different ways people react to change.

The parable tells the tale of two mice and two “little people” who live in a maze and spend their days scurrying about in the eternal pursuit of cheese, much like investors in their constant quest for higher yields.

One day the four stumble onto a piece of cheese so large that two of the characters, Hem and Haw, declare that they shall never again need to search for cheese. They become accustomed to this constant source of cheese and push aside any thought of ever having to find another piece — similar to how investors can get used to high returns from a particular type of investment and think they will never need to find another type of investment.

The other two characters Sniff and Scurry, however, never stop exploring their surroundings and are constantly attuned to changes in their environment knowing that the cheese cannot last forever.

Eventually the supply of cheese is exhausted and the four are left with nothing. Sniff and Scurry are able to take this new development in stride and scamper off in search of a new cheese source. However, Hem and Haw keep returning and staring at the same spot hoping the cheese they had become used to would still be there somehow. They had counted on the cheese supply to be constant, and so were unprepared for this eventuality.

My friend’s cheese had moved and she was still looking in the same place day after day (the fund) for the same cheese instead of looking for new cheese.

Since the unpredictable returns of the fund were causing her anxiety, her investment advisor suggested that she move some of her funds into a fixed rate investment as some of his other clients with similar concerns had done.

First he offered her a low risk, short term product that paid 4.25 per cent per year on her US dollars. My friend admits that she openly scoffed at the rate since that was less than she was used to. Interestingly, I noted that the 4.25 per cent was higher than she was getting on the fund at the time, and at least she would have known for sure how much returns she could expect for the year.

Since she was not impressed with the 4.25 per cent, her advisor suggested a recently issued bond by an issuer with an excellent credit rating that was paying 8.125 per cent per year. My friend admits that she even turned that down. She could not accept that gone are the days of double-digit returns on low risk US dollar investments and that she would have to adjust her expectations or take greater risk to get the returns she desired.

Eventually, instead of moving some of her funds into one of the fixed rate products her advisor had suggested, she made the rash decision to encash her entire investment and went to another institution who had promised her the above 10 per cent returns she was seeking.

About a month later, the value of the fund at her old institution started to increase, as her advisor had predicted, and the unit price is now the highest in the fund’s history. Incidentally, it turned out that the double digit returns that the new institution had promised her were not guaranteed and required more risk than she was willing to take.

My friend had made a common investing mistake of not realising that what works today may not always work forever. Change is constant, especially in the investment world.

As markets change, investors need to recognise when they have “milked” all they can out of any existing investment and either adjust their expectations or move their funds into a new investment instead of getting angry with the cow for producing less milk than they are used to, even when they have gotten so much milk from the cow in the past and have more in storage that they haven’t even used yet!

Sometimes the cheese will move.

Toni-Ann Neita is assistant vice-president – Personal Financial Planning at Sterling Asset Management. Sterling provides medium to long term financial advice and investments in US and other world market currencies to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm. You may visit us on Facebook or follow us on Twitter and for more information please visit our website www.sterling.com.jm