Help With a New Year's Resolution

People want to save money (for education, for retirement) but find it difficult and sometimes scary.  Is putting money in the stock market the same as gambling?  Let’s take a look.

Here is a story from 2015 reporting that Americans spent $70 billion on lotteries the prior year, “more than $230 for every man, woman and child in [the 43] states where the lottery is legal.”  This amount varied from $36 in North Dakota, to nearly $800 per capita per year in Rhode Island.  (It could have something to do with access to high-paying petroleum jobs in North Dakota while the Rhode Islanders might catch a glimpse of all the rich people’s yachts and want to join them – or maybe not.)

To update the information a bit, I found a  CNN Money piece from last year giving the total lottery spending of $80 billion.  That would move the current average closer to $260 per person per year.

I’ve written about lotteries before, about what a bad deal they are, how the states consider them voluntary taxes, how you get better odds from casinos and how they generally prey upon the poor.  This is well reported on the news and should not surprise anyone.  But the bets are small and seem affordable even if the odds are terrible.  You can get rich quick but are much more likely just to be making a weekly donation to your state’s tax revenue.

What is the alternative?  If everyone took their (average) $260 per person and put it into a conservative investment portfolio, the results would add up surprisingly well.  After 10 years such a fund could have grown to over $3,600 per person or about $11,000 for a family of three.

To get those numbers I used a theoretical mix of real index mutual funds with 62% invested in stocks, 32% in bonds and the rest in a money market fund.  This is a very conservative and reasonable mix for a younger person (30-45).  It is also highly diversified and automatic by virtue of being an index fund.  When I looked up the returns for that mix over the last 10 years, the rate was 6.1% compounded annually.  Remember, that 10-year period includes 2008 when the stock market was seriously tanking and 2017 when it was soaring.  There was much variability, which can be scary, but the overall trend over long periods has historically been positive.

The question is whether it’s smarter to invest your money at those pathetically poor lottery odds – 10,000 to 1 on a simple pick 4 card or about 290 million to 1 for the Power Ball – or to actually have (in your pocket, so to speak) $11,000 for your family.  Making the right decision shows strong behavior in critical thinking and discipline.

Other sources of potential savings with no downside include homeopathic remedies.  After I mentioned them in an essay before Christmas, a reader sent this link to CBS with this excellent summary.  “The market for homeopathic ‘medicines’ has grown to $3 billion, according to FDA. These remedies are often sold next to bona fide treatments like Tylenol and aspirin despite little evidence they actually succeed at treating anything at all. In fact, homeopathic products have sometimes been ripped from shelves due to deleterious side effects, as when more than 100 people lost their sense of smell using products with zinc gluconate in 2009, or when a brand of teething tablets was linked to seizures and death in infants and children.”  Throw in another $28 billon spent on nutritional supplements and we are looking at the potential for big bucks in your own account, not gambled away on the lottery or outright thrown away on ineffective medicine.