Each month, millions of people check the premium bond draw to see if they’ve won anything. Although the odds aren’t in your favour to win a large amount above £10,000, you could still pick up a good return on a relative basis. For example, if you invested £1,000 and you won a prize of £100 one month, this represents a 10% return on your investment. Given that the downside is limited, this isn’t a bad investment.
But is checking the premium bond draw each month really the best way to try and make a million? It may be a good way for smaller income amounts, but for targeting a larger vision I’d stick to FTSE 100 stocks instead.
FTSE 100 stock potential
From my point of view, you’re more in control of your own destiny with FTSE 100 stocks. One could argue that premium bonds are like playing the lottery. It’s a lot of luck, without any skill needed from the investor. When investing in FTSE 100 stocks, skill is needed to be successful. This doesn’t mean it’s impossible to make money via stocks. What I’m getting at is that you can outperform a benchmark and achieve better returns from selective investing.
For example, the FTSE 100 index as a whole is down 24% this year. However, take a look at some individual performers. I wrote a piece months ago praising Ocado group. The Ocado share price has almost doubled this year!
I’d much prefer to pick stocks that I believe can do well, and invest. Premium bonds don’t have any element of outperformance, each bond is identical. The mathematical chances of your bond generating more income than someone else’s bond is zero.
Planning to win
You can also carefully plan out exactly the steps needed to reach the million mark, and work towards that. For example, I can look at historical performance of the FTSE 100 and use it as a gauge of future potential. History doesn’t always repeat itself, but over several decades it’s clear the broad direction of the stock market has been higher. Let’s say I invest and pick up an average return of 8% per year. If I invested £1,000 a month with this return, I’d reach the million mark after around 28 years. For someone in their 30s, this is a perfect timeline to enjoy the funds for retirement.
This approach gives you a better plan on trying to make a million instead of premium bonds. In the November premium bond draw, someone did win a million. But they didn’t plan on that the same way we planned the above expenditure to achieve the returns needed. You could wait 28 years and end up nowhere near a million with the premium bonds by itself. To me, that’s simply not smart investing.
Looking for the bigger vision
You may have won a decent prize in the November premium bond draw. I’m happy about this, and hope to do the same. There’s a place in an investment portfolio for bonds. However, if I’m wanting to target big returns, I feel I need to be invested in stocks.
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jonathansmith1 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.