The $80 Billion Tax That’s Killing Your Portfolio
A lucky person recently did the unthinkable: They turned a couple bucks into $543 million…
By simply buying the winning Mega Millions jackpot ticket.
This was the third Mega Millions jackpot to top $451 million this year. And it was the second over $500 million.
It’s a game that Americans can’t get enough of.
The offer is too tempting to pass up. A mere $2 bet can be transformed into millions of dollars… or, in this case, hundreds of millions of dollars.
When the jackpot grows to a monstrous size, more and more people rush to buy tickets. This diminishes the odds of winning but inflates the jackpot.
And spending is growing… Leisure gamblers spent more than $80 billion on traditional lottery tickets in 2016.
On average, each U.S. adult forks over $325 for lottery tickets each year. And on the East Coast – where Mega Millions and Powerball are king – the average amount spent each year could be double that.
Now, if you’re like me, you either never play or throw in a couple bucks for fun only when the jackpot tops some absurd number.
That means a lot of that spending originates from diehard players.
As if that isn’t bad enough, the odds of winning have increasingly gotten worse over the past two decades.
Since its inception, the Powerball lottery has reformulated the odds six times to make it harder to win. For instance, in 1992, winning the Powerball jackpot was a 1 in 55 million chance. Today, it’s 1 in 292 million.
Besides the terrible odds, the lottery is just a voluntary tax disguised as a game of chance.
States take nearly 40% of every lottery ticket as revenue.
Not to mention anyone who wins $600 or more is taxed 45%.
Don’t get me wrong; the government has a vested interest in selling Americans lottery tickets.
(Which is also why I have two active gaming and lottery recommendations in my services and special reports this year.)
But here’s what’s troubling…
The Power of Watching Grass Grow
Most people will gladly waste money on the pipe dream of a lottery ticket. Yet roughly half of Americans aren’t invested in any stocks.
Now, we often hear that investing in the stock market is akin to gambling. Or that owning a share is like buying a lottery ticket – you’re going to win big or lose everything.
That couldn’t be further from the truth.
When you own shares of a company, you take a stake in a business.
The company may succeed. Or it may fail. Those are the risks.
Just as a binary equation, that means an investor has a 50-50 shot. Those are considerably better odds than any lottery ticket. And that’s if we simply choose a stock at random.
But what’s often overlooked is that the chance of success in the market is much higher than 50%.
That’s because we’re not randomly scratching off squares with a quarter hoping to match three of a kind…
We’re doing research.
We know which companies are seeing revenue and earnings increase at rates above those of their peers.
We can follow trends.
We can buy near lows and sell near highs.
All of these increase our odds of success!
And the longer you’re invested, the higher your chances of positive returns are…
In fact, once you’re in the market more than a decade, your chance of winning increases to nearly a guarantee. And after 20 years, you have a 100% chance of success, according to Returns 2.0.
Now let’s look at the last 20 years of the S&P 500 and its annual returns…
Let’s say we took that $325 we spent on lottery tickets and instead put it into the S&P 500 starting in 1998. And each year, instead of buying more lottery tickets, we added another $325 to our index holdings.
By the end of 2017, we’d have more than $16,825, according to Bloomberg.
That’s a gain of more than 156% on the $6,500 we invested. And we did nothing fancy with it; we just bought the S&P.
There were four years of losses: 2000, 2001, 2002 and 2008.
If we added another 10 years, starting in 1988, our S&P 500 holdings would’ve been worth more than $47,958 by the end of 2017.
Simply put, lottery tickets won’t make you rich. Even if you defy the odds and win, 70% of jackpot winners are bankrupt within five years.
So investing isn’t like buying a lottery ticket. Nor is it like gambling in a casino.
It’s building wealth, slowly and surely over time. As Nobel Prize-winning economist Paul Samuelson said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”