The odds of making a million by playing the National Lottery are slim. In fact, you are almost certain to lose money. Investing in the stock market might be a better way to build wealth over time. Stocks and shares can be held inside an investment ISA providing a tax-free wrapper. A combination of dividends, share price growth, and regular investment, can build a sizeable portfolio over time. Stock market investing is, in my opinion, a better way to secure your financial future and perhaps make a million than the lottery.
It’s a lottery
I simulated playing 13 lucky dip lottery tickets once a month for 25 years a thousand times. The results were not encouraging: on average the lottery players were down £5,105, with the worst performer losing £5,846 and the best losing £2,838. Now, buying all those tickers would have cost £7,800, so our simulated players all won something. However, they did not win enough to even cover the cost of the tickets let alone make a million.
Of course, the price of a lottery ticket can be worth it for the thrill of being in the draw and the chance to dream about a big win. After all, someone has to win, and yes it could be you, but it is very, very unlikely. But what could happen if instead of playing the lottery the money was invested in stocks?
Stock market returns
The average total return (which includes dividend reinvestment) of the FTSE 100 over 25 years is 8.33% per year or 0.67% per month. So, instead of buying 13 lottery tickets a month for 25 years, what if £26 was invested each month in a fund that tracks the FTSE 100? On average, a £24,888 portfolio would be built. Compare that with the average loss of £5,105 that the lottery players experienced.
Investing £100 a month in a FTSE 100 tracker would net £95,723 on average over 25 years. Investing £500 yields £478,616, and putting away £1,050 a month averages £1,005,094. Making a million is always going to be difficult. But, with stock investing your money is working for you. Stocks pay dividends, which can be reinvested, alongside regular investments, to buy more stocks that pay dividends, and so on. This is the power of compounding. The more money invested each month the more likely an investor is to make a million.
Stock market investing is not without risk. But, risk can be managed. Investing in an index like the FTSE 100 spreads risk among a hundred stocks. Investing in an index is suitable for those who lack the confidence to pick stocks themselves or who want to rely on others to do so on their behalf. It is, of course, possible to invest in individual stocks. However, stock pickers need to be mindful that risk generally decreases as more stocks are added to a portfolio.
Making a million
The point of this article is not that the lottery should be abandoned. Rather, I am suggesting that if someone can afford to buy lottery tickets, then they can probably afford to invest in the stock market. An ISA can be opened with minimal fuss and funded with as little as £25 per month. You are unlikely to make a million investing that much, but odds are you will get a lot closer to the magical number by investing in the stock market rather than buying lottery tickets.
James J. McCombie has no position in any of the shares mentioned. 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.