What's the Smarter Play for Your Money: Powerball or the Market?

Key Points

• Point: The Powerball lottery prize is past $1 billion.

• Counterpoint: Powerball players will probably lose close to $700 million, collectively, by playing.

• These 10 stocks could mint the next wave of millionaires ›

At an estimated jackpot value of $1.4 million, the Powerball lottery drawing to be held tonight is drawing plenty of attention. And it reminded me of a lottery research report The Motley Fool published back in May.

Specifically, it reminded me how very bad the odds are of winning a lottery, and how very quickly -- mathematically speaking -- you can lose a lot of money buying lottery tickets. (Statistically, you really are a lot better off investing in the stock market than buying lottery tickets.)

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Lottery math

Here's how the math works. Focusing on lotteries conducted in 2023, The Motley Fool's research shows that Americans spent $103 billion on lottery tickets that year. But only $69 billion of that money came back to the ticket buyers in the form of prizes.

Already, this suggests that for every $1 you spend on a lottery ticket, you can expect to get back less than $0.67 in winnings. But wait -- it gets worse.

"Jackpot" numbers aren't necessarily all they're cracked up to be, because payouts are made over 30 years (or paid in an immediate, but much smaller lump sum), such that the present-day value of the award is much smaller than the headline figure.

In the case of the current Powerball jackpot, for example, Powerball's own website explains that the immediate cash value of the current $1.4 billion jackpot is just $634 million -- just 45% of what players probably think they'll be getting if they win!

Result: Pay $1 today, and on average, you can expect to get back just $0.30 of your "investment."

How does this work in practice? Say you start with $1,000, and spend it all on lottery tickets in a single day. You can expect to "win" back $300 of your starting $1,000. Do this again on a second day, and you'll have just $90 left to spend on lottery tickets on Day 3, $27 on Day 4, $8.10 on Day 5, $2.40 on Day 6, and by Day 7, you'll have just $0.73 remaining.

Too little money to afford to buy even one lottery ticket.

Powerball notes that the odds of winning the grand prize are 1 in 292 million.

A better play for your money

The math is incontrovertible. Statistically speaking, you're guaranteed to lose money playing the lottery over any length of time. But the opposite seems true for investing in the stock market.

In fact, over the last 97 years, investors in the S&P 500 have enjoyed an average profit of 10% per year. That's an average. Some years show gains; some show losses.

That's a 10% average annual profit despite these 97 years including 13 recessions, one Great Recession, and one Great Depression.

And over that time span, an initial $1,000 investment would have grown into $10.4 million. It would grow even more if you regularly added a little on top of your initial investment.

Caveats and provisos

Does the stock market go up every year? Are you guaranteed to always make money investing in stocks, no matter what?

Of course not. Stocks have bad years as well as good, and there's no telling what kind of year you're going to have, any given year, before it's over. But over long periods of time, investing in the stock market seems to me the closest thing you'll find to "a sure thing" in this lifetime.

Given a choice between putting my money at risk in a lottery that's statistically guaranteed to lose everything in a week, or investing in a stock market that -- with patience -- has a proven, demonstrated, century-long record of growing investor cash over time, I know which one I will choose.

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