The National Lottery it could be you… but probably not. So what about a low risk investment instead?
With the Stock Market gyrating wildly it is easy to see investment and gambling as very similar activities. Understanding risk and managing it are crucial to successful investing with successful returns.
But how do you get the balance right?
As risk and return are intimately linked the promise of low risk investments with a high return should always be treated with the same caution as an email offering you large sums of money in exchange for your bank details. When investing money we want to maximise the return but minimise the risk taken. Gambling, in the words of Warren Buffett, is creating risk where no risk needs to be created. Gamblers are risk seekers; in contrast, most investors are risk averse and looking for a low risk investment.
Which is how we get to the National Lottery. Since its launch in 1994, it has been hugely popular in the UK, although seen by many as the only tax people queue to pay. It is very unlikely a lottery win will significantly add to your personal wealth but millions still play and see the cost of a ticket as a low risk investment.
So what are the chances of winning? Is it a good low risk “investment”? How does the chance of winning compare with other chance events? We’ve done a little research on this very subject. The chance of winning the Lotto jackpot is approximately 14 million to one (1), which is a better bet than the 19 million to one chance of being killed by a lightning strike in any one year. (2)
What about the chance of dying on the day you buy your ticket? Approximately half a million people die in the UK every year, so assuming all people are equally likely to die on any one day, your chance of dying on the day you buy a lottery ticket is 44,000 to one. (3) So you are more than three hundred times more likely to die in the 24 hours before the Draw Master does his stuff than win the jackpot.
However, as a rule, the older you are the smaller the chances of you surviving the day are. This suggests that a healthy young person could safely buy a ticket a day before the draw and have a good chance of surviving to pick up the lottery win. Some of our more senior advisers, however, might want to consider buying their ticket a few minutes before the draw to equalise their chances of winning and dying!
In all seriousness though, can gambling or lotteries have any place in a financial plan which prefers to have low risk investment?
One piece of sound investment advice is always to have an emergency fund to fall back on in case of unexpected events. This should be separate and in addition to your long term savings. Ideally this should be at least 6 months salary and it’s recommended that you use an instant access Building Society or Bank deposit account with the best interest rate you can find.
If you want to play a lottery and not risk your capital, you could consider National Savings and Investments (NS&I) Premium Bonds as a place for your rainy day fund. Introduced in 1956 by Harold MacMillan Premium Bonds met stiff resistance and were described by Harold Wilson as a “squalid raffle”.
The bonds pay no interest but instead are entered into a monthly prize draw offering prizes from £25 to £1 million. With more than £26 billion Premium Bonds in circulation the chance of winning the top prize of £1 million pounds is much less than winning the National Lottery jackpot, and the odds of winning any prize is 24,000 to one. (4)
It’s also important to remember that if you don’t win, inflation eats into the purchasing power of your money. But your capital is not at risk, it’s guaranteed by the Government and it can be withdrawn at any time. With average luck the return at present should be 1.5% and all winnings are tax free. (4)
So if the chance of receiving a cheque from the Government appeals then Premium Bonds may be worth considering. Just remember though, that whether it’s National Lottery or Premium Bonds, it’s more likely not to be you!
For a free consultation about your investments, call Andrew Stallard on 0845 230 9876 or e-mail email@example.com.