Ladies and gentle, uhh, Fools, today I bring you bad news: Your compatriots are fools (and not the kind that wear the capital "F" with pride).
According to a pair of surveys commissioned by the Consumer Federation of America and the Financial Planning Association back in July (the results of which were released on Jan. 9), a sizable portion of the American public is convinced that its best chance of acquiring real wealth is by winning the lottery. An even larger portion of the populace believes it will never amass even $200,000 in a lifetime.
Balderdash. On both counts.
Myth No. 1: You can win the lottery
According to the survey of 1,000 adult Americans, 21% agree with the statement that "winning the lottery represents the most practical way [for them personally] to accumulate several hundred thousand dollars." That's great news for lottery operators such as GTECH
We all know that the chance of winning a lottery is just 1 in 80 million or so -- in theory at least. But too many people take the "80 million" as a given, and therefore don't think about it. They dream of the "1" and just hope against hope. Problem is, there is no hope.
I mean that quite literally. No hope. None at all.
Consider: On average and over time, for every $1 spent on a lottery ticket, a buyer can expect to receive approximately $0.44 back in "winnings." Now say you're a happy-go-lucky rich guy with $10,000 to blow on the lottery. Say you want to "invest" that money in lottery tickets and to keep on "investing" the proceeds of your bets in even more lottery tickets. How long do you think you could keep this game rolling?
Answer: If you buy $10,000 worth of $1 lottery tickets on Day 1, then statistically speaking, you'll have $4,400 left to spend on Day 2. Do that and by Day 3, you're down to $1,936. Keep going, and by the end of the week, you've got $31.93 left to your name. Five more days and you're all washed up -- just $0.53 in your pocket and too poor to buy another ticket.
Myth No. 2: Dang. Myth No. 1 was my only hope!
The survey's other frightening factoid was that only 26% of individuals surveyed believed they could ever amass $200,000 in savings over the course of their lifetime.
Ready for some irony? In 1996, state-run lotteries consumed $34 billion. That works out to a little more than $130 for every man, woman, and child living in the United States at the time (in 1996 dollars). Throw in the effects of inflation, though, and in 2005 dollars, it's worth $158. Want to try and guess how much you would have to put away every month in order to end up with more than $200,000 in your brokerage account at the end of 25 years?
Smart cookie. If you can put as little as $158 per month into a simple S&P 500 index fund, compounding at its historical rate of 10.5% per annum, then 25 years of diligent saving and investing will find you sitting on more than $200,000 in savings at the end.
Myth No. 3: Huh? There was a third myth?
Indeed there is. What surprised me almost as much as the misconceptions revealed in the survey results was the inherent misconception on which the survey was based: that $200,000 in net wealth should be the goal of someone aiming to become "rich."
Even with a portfolio constructed entirely from dividend-paying stocks, you'd find yourself hard-pressed to get by on the income stream that $200,000 can generate (a stream that will decrease as you withdraw money to cover the costs of living). Take a look at a few examples:
|
Company |
Dividend yield |
Annual return on $200,000 |
|---|---|---|
|
Merck |
4.6% |
$9,200 |
|
Altria |
4.2% |
$8,400 |
|
Pfizer |
3.9% |
$7,800 |
|
Intel |
1.2% |
$2,400 |
|
Motorola |
0.7% |
$1,400 |
Worse, the average yield of a portfolio like the one described above is 2.9% (which would, incidentally, net you about $5,840 per annum). If you go the simple route of investing in an S&P 500 index fund, however, your dividend yield would drop to 2.0% and a $4,000 annual return.
Fortunately, at The Motley Fool, we have devised a solution that can help you achieve the survey-posers goal of $200,000 much faster than an index fund can. One that can help you surpass it and move toward the $1 million in net wealth that you would actually need to live a life of relative ease.
By recommending only the cream of the crop of American mutual funds, the Motley Fool Champion Funds newsletter has achieved returns of 21% since inception, beating its benchmarks by nearly 10 percentage points. While there's no guarantee that we can keep that kind of performance up, if we do, it's worth pointing out that $158 invested every month would grow into more than $1.5 million over the course of 25 years. To learn more about how we achieve such results, all you have to do is sign up for a free trial. Go ahead: The returns will beat anything you can expect from the lottery, and it won't even cost you a buck to play.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that. GTECH and Pfizer are Motley Fool Inside Value recommendations. Merck is a Motley Fool Income Investor recommendation.
