Why the Powerball Jackpot is part of my investment strategy

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As I got ready for work today, the newscaster mentioned that the Powerball jackpot was $310 million.  I'll be heading over to my 7-11 to buy a ticket ! For over a day, I can have the excitement of imagining what life will be like to be so filthy rich.  Will I take the $193 million cash up front or the $310 over time? 

Not since early last year when the jackpot was $330 million have I been so excited.  But why is it part of my investment strategy? Let me explain.

My investment strategy is roughly 99 percent boring and 1 percent exciting.  The big, boring part comprises low cost diversified index funds and the highest-paying CDs with easy early withdrawal penalties.  Though boring, this strategy has earned me an estimated 7 percent annually over the past 10 years that many call the "lost decade."

While my dull strategy got me to financial independence, I know I'll never be filthy rich. I'll never have my private jet nor villa on the French Riviera. And I'm not ashamed to admit that I'd like to be filthy rich.

That's where PowerBall comes in. For the price of just two dollars, I can exercise the piece of my brain that wants to enter the fantasy world of the rich. Of course I understand the odds of me winning are virtually zero but, fortunately, I'm human, which means I'm irrational. Thus, I'll imagine I have a 10 percent chance of winning the whole jackpot.   After all, I'm luckier than average -- I just found a dime in the vending machine!

Why I value PowerBall

Without PowerBall, I might be tempted to do foolish things with my real portfolio. I could buy into hedge funds to get promised high returns without risk. Or maybe go with a separately managed account with a money manager sporting a great track record. Or how about buying into the notion that gold will hit $10,000 an ounce?

Any of these strategies probably has a much lower chance of making me filthy rich than the lottery ticket I'm buying today.  So for the sum of two bucks, I'll have 24 hours of imagining my filthy rich life. 

The perfect portfolio would be about 99.999 percent boring and 0.001 percent lottery tickets.  I'm not there, but I'm close.

Expect my next posting to be about how calmly I reacted when the numbers were called and I realized I had won it all. I'll say a couple hundred million dollars won't change my values -- really! 

Any advice -- should I take the lump sum or the annuity?

Author's note:  My original posting mistakenly referred to the price of a PowerBall ticket as $1. A reader pointed out that they actually cost $2. I don't often buy lottery tickets.



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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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