Playing the National Lottery might seem like an alluring prospect — who wouldn’t want the chance of making £1m or more by spending just a few pounds?
However, the chances of anyone actually winning the National Lottery are so slim that you are more likely to lose the money you spend buying lottery tickets than actually receiving a reward. You could play the lottery every day for 40 years and never win anything.
In my opinion, this lose-lose situation is not worth chasing, and with that being the case, I think the FTSE 100 will always be a better buy than a National Lottery ticket.
The better buy
Some investors might be wondering why I am recommending the FTSE 100 as a better buy than the National Lottery because it is well-known that stock prices can go down as well as up, and many people have lost a lot of money investing in stocks.
While this is true, it does miss out some crucial points. It is very easy to lose money investing in highly speculative companies, such as small-cap oil and gas stocks where the potential for reward is massive, but there is also a significant chance of a total loss. However, when you are investing in a well-diversified stock index such as the FTSE 100, the risk of a permanent capital impairment is practically zero.
According to analysis by the Financial Times, including reinvested dividends, over the past 20 years — a period including both the dotcom bubble and financial crisis — the FTSE 100 has produced a return for investors of more than 160%.
The reason why the index has performed so well that it is made up of the UK’s top 100 companies, which means it is virtually impossible for the index to go to zero. Even if the UK economy crashes into a depression, the FTSE 100 will prove to be a good investment over the long term because more than 70% of the index’s profits come from outside the UK.
Every single company in the index would have to fail in one go for it to wipe out investors, and if that happens, you are probably going to have more to worry about than losing your investment.
According to my calculations, over the past two decades, the FTSE 100 has produced an average annualised return for investors of 4.9%.
If you play the National Lottery twice a week, every week for 20 years, assuming a constant ticket price of £2 per game, it will cost a total of £4,160. Even the occasional small win would still mean an overall loss. In comparison, the same £4 a week invested in the FTSE 100 would have grown to £7,060, a profit of 70% on your money, compared to the possible loss of up to 100% of the money spent on National Lottery tickets.
So, that’s why I think the FTSE 100 would always be a better buy than the National Lottery. You are likely to lose most of the money you spend on National Lottery tickets, while every pound invested in the FTSE 100 will only grow over time.
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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.