Ask most people how much a lottery ticket is worth and the most probable answers will be the price of the ticket, the value of the jackpot or simply: “Is it a winning ticket?” The value of a ticket for a forthcoming drawing is none of these. The reason for this is related to a concept of risk and reward many people often fail to grasp, aren’t aware of or ignore at their own peril.
The concept is expected value. This is the projected value based on the probability of a given set of outcomes occurring. If it is possible to assign odds to a set of monetary outcomes, an expected value can be calculated. Expected value is a concept that works in a variety of situations. Investors, for instance, can use historical data to determine the likelihood of being able to fund retirement with a certain savings rate or allocation strategy.
The two multi-state jackpot lottery games provide great examples of how the concept of expected value works. Both Mega Millions and Powerball have specific and published odds for the possible winning outcomes. They also have published prize amounts. This allows anybody with a calculator—though a spreadsheet makes the calculations easier—to determine when the expected value of a lottery ticket exceeds the $2.00 cost.
More on AAII.com
- Planning Assumptions: Will the Real Long-Term Return Please Stand Up? – This 1997 article discusses some of the factors to consider when trying to determine what long-term rate to base future assumptions on.
- Power Your Portfolio With Value – Paul Merriman lists long-term return data—including the best and worst case scenarios—to explain why value investing is worth the slightly higher risk.
Highlights from this month’s AAII Journal
- Social Security and Medicare Can Raise Retirees’ Tax Rates – Higher levels of income can lead to more of your Social Security benefits being taxed or larger Medicare premiums.
- Charles’ “Buy of the Week” EPS Revision Screen – This is one of the custom screens I use to help select stocks to feature on Chuck Jaffe’s Money Life radio show.
AAII Sentiment Survey
Pessimism jumped to its highest level in more than year. At current levels, pessimism is unusually high and optimism is unusually low. More about this week’s results.
- Bullish: 26.1%, down 5.8 points
- Neutral: 31.2%, down 0.3 points
- Bearish: 42.8%, up 6.1 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
What’s Trending on AAII
- Using Bonds Instead of Stocks for Portfolio Income
- Are You Spending Too Little in Retirement?
- Model Shadow Stock Portfolio: Insights and a New Stock
The Week Ahead
Taxes must be filed by Tuesday, April 17. (Monday will be a holiday in the District of Columbia.) Tuesday is also the deadline for making 2017 contributions to individual retirement accounts (IRAs). Those of you who have yet to file may find our Tax Guide to be helpful.
First-quarter earnings season will start to pick up steam with 61 members of the S&P 500—mostly mega-cap companies—scheduled to report. Included in this group are seven Dow components: UnitedHealth Group Inc. (UNH), Goldman Sachs Group Inc. (GS), International Business Machines (IBM) and Johnson & Johnson (JNJ) on Tuesday; American Express Co. (AXP) on Wednesday; and General Electric Co. (GE) and Procter & Gamble Co. (PG) on Friday.
The week’s first economic reports will be March retail sales, the April Empire State Manufacturing Survey, February business inventories and the April housing market index, all of which will be released on Monday. Tuesday will feature March housing starts and building permits and March industrial production. The Federal Reserve’s periodic Beige Book will be released on Wednesday. The Philadelphia Federal Reserve’s April Business Outlook Survey will be released on Thursday.
Seven Federal Reserve officials will make public appearances: Atlanta president Raphael Bostic on Monday; San Francisco president John Williams, vice-chair Randal Quarles, Philadelphia president Patrick Harker and Chicago president Charles Evans on Tuesday; Cleveland president Loretta Mester on Thursday; outgoing New York president William Dudley on Wednesday; and Evans and Williams on Friday.
The Treasury Department will auction $16 billion of five-year treasury inflation-protected securities (TIPS) on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!