Why Take a 1-in-292,000,000 Shot? Is Investing the Safer Jackpot?

Key Points

• Lotteries promise to turn just a couple of dollars into billions.

• The chance of winning the lottery is vanishingly small.

• Buying an S&P 500 index fund is a totally different animal and one that history suggests will make you a long-term winner.

• 10 stocks we like better than Vanguard S&P 500 ETF ›

You have to be in it to win it, or so goes the pitch for many lotteries. And with the cost so low, often just a couple of bucks, why not go for it? You could turn that dollar bill into millions or even billions!

Or it could just go to the lottery company, and you end up with nothing. Here's why you'd be better off saying no to the allure of the lottery and, instead, putting your hard-earned dollars into an S&P 500 (SNPINDEX: ^GSPC) index fund.

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How much do people spend on the lottery?

In 2023, roughly $103 billion was spent on lottery tickets in the United States. That's a huge sum of money. But the interesting thing is that the amount of winnings from that $103 billion was only $69 billion, meaning that lotteries generated roughly $30 billion in revenue.

Some of that money has to go to the running of the lottery, of course, so a much smaller amount is profit, which can often be earmarked for a good cause, like education. All in, on average, lottery proceeds, after costs, amounts to an average of 2.3% of state revenue in the states that have lotteries.

Image source: Getty Images.

That said, all the people who play the lottery do not win the lottery. The chance of winning often changes, depending on the number of people who are playing. So, the really big headline-grabbing lotteries often have the biggest jackpots and the lowest chances of winning.

To put that another way, just when the most people are excited about the lottery is when they have the worst chance of actually winning the lottery. If 292 million people play, your chance of winning is 1 in 292 million.

Those are lousy odds, which suggests that most people putting a few dollars into the lottery would be better off doing something else. One option is to put that cash into an S&P 500 index tracker, like Vanguard S&P 500 ETF (NYSEMKT: VOO).

What are the chances of winning with the S&P 500?

Over time, the S&P 500 index has generally headed upward and to the right. In other words, the value of the index has steadily increased over time. In fact, the average return of the index over the past decade was roughly 10% a year, on an annualized basis.

The problem is that the annualized return is not the same as the year-by-year return, which can be shockingly volatile.

The volatility of the market leaves some potential investors feeling as if investing is nothing more than gambling. But the odds are very different. If you simply buy the index and hold on for the long term, which is what Wall Street legend Warren Buffett thinks most investors should do, history suggests you will end up a winner.

That's true even if you buy at a market top, assuming you hold for the long term. Look at the graph below. Even the worst bear markets and recessions look like nothing more than small blips in the S&P 500 index's steady upward march. That's a much safer "bet" than buying a lottery ticket.

^SPX data by YCharts

Luckily, it seems like most people agree, since over 60% of U.S. adults own stock in some fashion, be it directly or via a mutual fund or exchange-traded fund (ETF). That said, there is a distribution issue here, too, since the vast majority of the stock market wealth in the United States is owned by the richest people in the country.

Still, given the history of the market, buying stock is a much more reliable path to becoming rich than playing the lottery. Maybe there's a lesson in the fact that wealthy people own most of the country's stock market wealth.

Play the lottery for fun; invest in the market to build wealth

If playing the lottery brings you joy, go ahead and do it. Just put what you are doing into perspective. Playing the lottery is not a wealth-building decision -- it is a choice that will most likely leave you with less wealth.

If what you really want is to build wealth, buying stocks is much more likely to end with you being a winner. And it is as easy as buying the S&P 500 index and holding on for the long term.

Should you invest $1,000 in Vanguard S&P 500 ETF right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.