The Lottery vs Investing

Which is the "real dream?"

If you were offered a free Mega Millions Lottery card, which would you choose? (For those unfamiliar with Mega Millions, you choose 5 numbers between 1 and 70 and then a sixth “Gold Mega Ball” number between 1 and 25. Balls are then drawn at random to determine the winning combination. The number in parentheses below is the Gold Mega Ball. )

So, which would you choose?

Card A: 22, 44, 51, 6, 65, (22)

Card B: 1, 2, 3, 4, 5 (6)

Which of these cards is more likely to win?

What are the odds of winning the Mega Millions jackpot?

While we haven’t done a study on this, we guess that a majority of people would choose Card A because Card B seems truly impossible—what are the odds of the first six numbers being the winning combination?

Good question. The odds of winning with Card B are 1 in 302,575,350.

And what about the odds of winning the jackpot with Card A?

If you pause to think about it, it’s the same: 1 in 302,575,350.

It just feels like Card A, with the more random numbers, would be more likely than Card B with six consecutive numbers.

Range of Odds of Winning Mega Millions Jackpot if you Play Weekly for One Year

Now, which would you consider more stressful: investing in the stock market or “investing” in the lottery?

For many, the lottery feels less stressful. It’s really just a hope and a dream, but let’s face it, winning isn’t very likely.

In fact, if we create an Investment Return Wheel for the Mega Millions Jackpot—assuming you played once a week for a year, it would look like this.

The way this works is you’d spin the Wheel to see your return after 52 weekly plays. All spaces are equally likely.

You might wonder why there are no green spaces. There’s at least a chance you could win.

The problem is that the chance is so incredibly low that it doesn’t show up.

Range of 1-Year Returns in the Stock Market

Now, let’s look at the 1-Year Investment Return Wheel for the Stock Market.

If you need a refresher on Investment Return Wheels, check out our post Putting Investing in Perspective.

In brief, the Wheel shows a plausible range of 1-year Stock Market returns (based on the S&P 500). One spin equals one year of investing. All spaces are equally likely.

Which Would You Choose?

If you had a choice of putting money on the Lottery Wheel or the Stock Wheel, which would you choose?

Ironically, stocks may feel riskier. Why? Because you don’t really expect to win the lottery, but you may be worried your Stock Portfolio could go down.

However, as we’ve noted before, a well-diversified, market-cap-weighted index, like the S&P 500, will recover from declines and go on to set record highs 100% of the time.

Just give it Time.

So, Which is Really the Dream?

Providing a sound financial nest egg is not that difficult, provided you start early enough to take advantage of the Power of Compounding, and avoid overreacting to short-term market declines.

The lottery isn’t a dream, or at least not a likely dream. It’s hardly a way to achieve financial security.

So if you want the real hope and dream of financial security, the Stock Market is the place to be.

Best regards,

Stuart & Sharon