Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, March 30, 2012

not a good investment.

Even without considering the extremely low odds of winning, lottery tickets are a terrible investment. People continue to buy tickets though, hoping to score the now $640 Million dollar jackpot. While the prospect of spending $1 and receiving $640 Million is exciting, the expected value of each $1 ticket is only 63.2 cents! That means that, on average, every dollar spent on the lottery only turns into 63.2 cents of winnings.

Where does all that money go?

Fees. Besides taxes on winnings, there are taxes and sales costs of each ticket, and about 28 cents of each dollar goes to state education funds. Those are high fees!

High fees are a common feature of terrible investments. After all, if an investment was compelling, it would sell itself - you wouldn't need a high-commission salesperson pushing it on you. Management fees on actively managed funds are a drag on returns. Trading fees take a little out of each buy or sell you make, lowering returns more. Keeping costs down is the surest way to boost your returns.

If you do buy a lottery ticket - have fun with it! If you win, contact a Registered Investment Advisor for some advice on what to do with it.