# Calculated Risk

One of the most infuriating arithmetical questions that has bugged my life off and on for decades is this: “If your salary was increased by ten percent to raise it to fifty thousand pounds a year, what salary were you previously on?” My gut response is always to say that you were on forty five thousand, because 10% of fifty is five and……wrong, wrong, wrong! (again)

I pondered this as I smugly reviewed my investments on Fidelity recently, mentally warming my hands against the financial glow from the growth, and a somewhat disquieting thought disturbed me – how do I know they’ve got their arithmetic right? All those dividend payments, currency fluctuations and compound returns, minus their management charges across a variety of accounts – I mean, who’s checking the sums on my portfolio are correct? Because I, unable to calculate a simple percentage sum, sure as Hell can’t do it.

I then began to remember the legions of financial controllers and directors I’ve worked with over the years and the errors they (often cheerfully) made in their own numbers. Too many numbers and variables, you see, to ensure that everything was a hundred percent checked. But even the most complex business I’ve worked in, I imagine, would be simplicity itself versus running Fidelity?

Later in the week, I heard on the radio that the government’s state pension forecast tool, which estimates what your state pension will be, was in hot water for giving erroneous projections. Okay, we expect the government to cock up any and every computer system it invests in, but still, it underlined my suspicion that it’s relatively easy for anyone to get their numbers wrong.

The thing is, they could err either way. My investments and pensions could be over or under stated (I can’t actually decide which would be worse). If they wrote and informed me of this, what would my recourse be? Ask for the data so that I could check the numbers?

Ever since Primary Six at school, when I think I first encountered tackling fractions in maths lessons, I’ve struggled with percentages, ratios and functions. Perhaps if that had been a more positive experience maybe I’d have gone on to be an accountant, but I was intimidated by the numbers (and by the teacher). I’m sure many people are entranced by the prospect of puzzling out answers that stack up when they face a difficult calculation, but me, I’m just ever so slightly terrified.

It’s also been my experience at work that if “You don’t know your numbers” then that can be a powerful criticism. There’s little to match the horror in a business presentation than when someone points out that you’ve made a basic error in a spreadsheet calculation. You feel your credibility in just about everything else has just been completely blown out the water (yes, I have been there and got the T-shirt. In fact, a small collection of them). For some reason this can happen to finance people too, but they seem to be able to generally laugh it off. Which I can only put down to confidence in their own ability in this area. When I made such an error I felt like an utter clown and would be genuinely mortified, but if I saw other people do similar I felt it made them a bit more human. (That’s probably two reasons right there why I never made it to “the top”!)

The trick, in your career, is to latch on to someone who really does know the numbers and is willing to check yours. Perhaps that would be a good idea in investments too? Unfortunately they’d probably charge a small fortune to do it and, of course, I’d continually be asking “How do I know you’re right?”

So there you go. I’ve no option but to take my investment performance “on trust”. It’s a lot to ask when I consider that this is my life savings I’m talking about, but I don’t really see much option. Then again, the whole monetary system is built upon trust and very little else. It only exists because we all choose to believe that it does.

As an investor I like to tell myself that I’d never invest in something I don’t understand – and then I read over what I’ve just written, and realise that I don’t actually understand anything.

Well, at least I understand that.

## 13 thoughts on “Calculated Risk”

1. Stefan

I reckon there are so many variable in the calculations that you are guaranteed to be getting ripped off.
On the other hand our Ocado delivery today sent 3 packs of fever free tonic rather than one so strike one for the man 😁

As for the financial soundness of buying fevertree tonic, there is a blog post on its own!

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• I do buy Fever Tree, but I’m not totally convinced. I was a G&T drinker long, long before it became so very fashionable, and it’s a hard drink to spoil. Or so I thought until I tried some Lidl cheap tonic water! Haven’t tried the Aldi stuff.

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2. The Rhino

on the subject of fever tree tonic water, try googling ridge valley tonic water to see what Aldi are flogging. It is outrageous! Yay Aldi!

Some things are not meant to be understood, or necessarily be calculable. Fund and broker costs fall into this category, as does your HMRC tax calculation. It is essentially bistromathics.

The best you can do is understand *roughly* what the numbers should be so you are aware if something is *way* out, giving you opportunity to rectify. If it seems ballpark right that is absolutely the best you can do.

Anyone who claims to be able to exactly corroborate their investment expenses or HMRC tax bill is either a pathological liar or clinically insane.

Your incorrect salary calculation is actually a good ballpark approximation that you can quickly do in your head to check if things are roughly right – so it has value. Bit like the rule of 72..

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• xeny

Due to a change of address mix up, I once had to do a tax return 3 years in arrears, not having anticipated needing it. Due to being in arrears I had to do the calculations, and of course not having 3 years prior anticipated being asked for a tax return my records were not best ordered.

The value of what I owed HMRC (or vice versa) wriggled all over the place until I was confident I had the “right” figure and clinical insanity was beginning to feel attractive – at least that way I was probably immune from prosecution over the lack of said tax return.

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• I do like your suggestion, that it’s okay to be roughly correct. Again though, I think that comes from having a confidence with numbers, because I’d tend to look at a good estimation as being a wrong answer, as per my salary calculation.

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• The problem about being “roughly” accurate is that this is exactly what some people in the industry expect you to do. A tiny misunderstanding on how some of these “fees” work might lead you to believe that a 3% fee is not that big a deal, even though everyone around you insists that you should find 0.25% or less.
I’ve been badly burned in the past by half-assing it in personal finance.

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• The Rhino

@SHMD – fast approximate heuristics that you can perform mentally are useful for stuff like restaurant bills where the result is time sensitive, i.e. an hour or so after you’ve left is too late to realise you were overcharged.

@Stockbeard – Theres nothing ‘roughly’ about your example – you must divide 3 by .25 which is quick and easy to do. What you’re referring to here is a separate issue – the ‘great financial blind spot’ which is specifying a fee in terms of a % of the total amount rather than the return on that amount. Once that’s been pointed out once to you, the blind spot disappears and you don’t fall foul of it again. It’s a very simple, but also a very genius piece of marketing which is the gift that keeps giving to the financial industry. Note that even letting agents don’t have the balls to do it, i.e. they don’t specify their fee as a % of the value of the property being let, only a % of the rental income. It is utterly outrageous but at the same time completely widespread and accepted.

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3. cat793

Yes I have also pondered this many times over the years too. I am also not a STEM minded or trained person so I am not going to check everything myself. I have resigned myself to more or less taking it all on trust while keeping an eye out for anything that is clearly wrong.

This complexity is one of the reasons I think the DIY approach to retirement provision is so crazy. It is way beyond all but the most technically minded and interested people to be able to make sense of all the options and potential outcomes.

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• xeny

confession, I am a STEM person. That said, spending a day or two to get moderately comfortable with either Excel or Google Sheets makes it much more practical for the end user to make sense of retirement options as you can calculate (slightly rough) figures to compare various options and outcomes with maybe a couple of hours work, and you then _know_ you’re taking a reasoned decision rather than whatever the FA is selling that week.

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• I was chatting to a friend today about pensions, and people really are intimidated by the complexity and options. I cannot understand why it has become this way, when it’s such an important part of our futures. But I do feel it’s worth trying to understand as much as you can. I know I’ve learned loads about pensions over the last few years, something that always surprises me when I talk to others about their plans and options and discover that I do know quite a bit about the subject.

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• cat793

@xeny and SHMD. I didn’t want to imply that I am totally hopeless and helpless with the issues. I have read Tim Hale’s book on investment and enjoy researching the subject. However it seems to be that subjects such as how much to save and when, investment allocation, longevity risk, safe withdrawal rates, how to draw down the money when retired etc etc are complicated and the answers are often basically unknowable. I guess the poor rely on the state and suffer what may as they have done in the past and the rich have enough to have plenty of leeway. It is those of us in the middle who used to rely on the triple pillars – state pension, defined benefit pension from employer and other assets such as savings and house – who are left in a precarious position. The increasing unpredictability and instability of employment and high cost of housing just makes it even more difficult to manage. The best you can do is learn as much as you can and be as prudent as possible I suppose.

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4. Mick

Divide the 50k by 110 and multiply the answer by 100 to get original salary

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• The Rhino

well done mick. You could divide by 1.1 if your comfortable moving away from integers?

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