It is often the ‘old-school’ print advertising that draws me in. This week, the newsagents are at it again, spruiking lotto tickets for the Powerball: “$150 MILLION JACKPOT.” As a consistent participant in the bigger lotto draws, technology advancements mean that I now also receive all sorts of targeted marketing including emails, Google ads, and posts on my Facebook newsfeed. Who wouldn’t want to win that kind of money?
Hey, I’m not greedy – I’d settle for either 1/150th=$1 million or 1/100th=$1.5 million. A cool $1 million, what a boost to the retirement fund that would be! And everyone has their ‘number’… meaning the amount of dough you would need to quit your job on the spot and enjoy an early retirement. Let’s just say $150 million is well above my ‘number.’ Some say retirement is the #1 cause of death. I will take my chances.
So, I went for it. It has to be my lucky day, right?
Ahead of me at the counter was another lottery player, clearly with his eye on the loot. The man bought tickets worth nearly $60. For sure, he had a better chance of winning than I did with my basic $5 ticket but, in truth, the odds were against us both. The chances of winning a lottery jackpot vary somewhat depending on the particular game, but are typically between 100 million to 300 million to one. Best not give up my day job, just yet.
The man eagerly handing over $60 to play made me wonder how many Australians ‘invest’ this kind of money every week in pursuit of big prizes and a possible fast track to retirement. Sixty dollars a week is around $260 per month, or more than $3,000 per year. That’s a lot to spend on something where the odds are so heavily stacked against you.
As opposed to the lotto, a true investment – you know, one where you actually own assets – typically generates positive returns over longer time periods. And the general rules of investing remarkably hold up well over time. For example: more risk, more return; there ain’t no such thing as a free lunch; the magic of compound interest, etc. So, let’s run the numbers…
Instead of ‘investing’ in the lotto every week, let’s assume a 25-year old puts aside $60 a week and invests that money on a monthly basis with contributions of $260 until their retirement, aged 65. Over those 40 years, the 480 monthly contributions of $260 would add up to nearly $125,000; the blue line on the chart.
Next, let’s assume that money is invested in a basic balanced fund (70% growth, 30% defensive) that’s invested across a diverse range of financial markets and generates an average annual return of 7% after fees and charges. This is a ballpark long-term estimate targeted by most money managers in these products. It’s also one that has historically been validated. Some of the balanced funds we manage at CFSGAM – the CFS Wholesale Diversified Fund and the CFS Wholesale High Growth Fund, for example – have returned above 7% p.a. after fees and charges over more than 20 years since inception1.
If the average annual 7% net return is achieved, after the 40 years the saver would be sitting on a nest egg of around $680,000; the green line on the chart. The saver isn’t quite a millionaire, but they’re nearly 70% of the way there. And with average superannuation balances currently around the $300,000 mark, with some sensible financial decision making and regular contributions, that magic million might be more attainable than many people realise. Now, that’s some serious cheddar!
Simulations like this come with various caveats and disclaimers. We know that past performance is no indication of future results and that assumed investment rates of return will affect the size of a savings balance over time. Inflation will erode the purchasing power of the final lump sum too. And as Yogi Berra put it, “The future ain’t what it used to be.” This may bode poorly for investment returns in the period ahead given current valuations across asset classes. Finally, who knows many 25-year olds that are thinking about sensible retirement planning? Nonetheless, the exercise highlights the power of compounding and how it can affect wealth accumulation over the long term.
So, when I pony up for those lotto tickets I’m doing it with the full knowledge that it’s a horrible ‘investment’ and instead should be thinking about the real factors impacting long-term wealth accumulation. In order of importance, these are:
- the amount you save;
- when you start saving;
- your asset allocation; and
- your achieved return, including above or below the market average.
You know what, with the benefits of a regular savings plan and the potential for a secure retirement, perhaps we can all afford to play the lottery now and again. The chances are you won’t win it, but it doesn’t hurt to dream once in a while. Good luck!
1 To 30 June 2019. The CFS Wholesale Diversified Fund returned 7.7% p.a. since inception (July 1995). The CFS Wholesale High Growth Fund returned 7.2% p.a. since inception (March 1999).
Disclaimer:
This information has been prepared and issued by Colonial First State Managed Infrastructure Limited (ABN 13 006 464 428, AFSL 240550) (CFSMIL). It is directed at persons who are professional, sophisticated or wholesale clients and has not been prepared for and is not intended for persons who are retail clients. This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision, you should consider, with a financial adviser, whether this information is appropriate in light of your investment needs, objectives and financial situation.The product disclosure statement (PDS) and Information Memorandum (IM) for the Multi-Asset Real Return Fund - Class A, ARSN 161 207 165 (Fund), issued by Colonial First State Investments Limited (ABN 98 002 348 352, AFSL 232468) (CFSIL), should be considered before deciding whether to acquire or hold units in the fund. The PDS or IM are available from Colonial First State Global Asset Management which is the trading name for Colonial First State Asset (Management) Australia Limited (ABN 89 114 194 311, AFSL 289017) (CFSAMA). CFSAMA is the investment manager of the Fund as at the date of issue of this material. MUFG, the Commonwealth Bank of Australia (Bank) and their respective affiliates do not guarantee the performance of the Fund(s) or the repayment of capital by the Fund(s). Investments in the Fund(s) are not deposits or other liabilities of MUFG, the Bank nor their respective affiliates, and investment-type products are subject to investment risk including loss of income and capital invested. The Author, CFSAMA and the Manager are members of MUFG, a global financial group. CFSIL is a subsidiary of the Bank. To the extent permitted by law, no liability is accepted by MUFG, the Author, CFSAMA, the Manager, the Bank, CFSIL nor their respective affiliates for any loss or damage as a result of any reliance on this information. This information is, or is based upon, information that we believe to be accurate and reliable, however neither MUFG, the Author, CFSAMA, the Manager, the Bank, CFSIL nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.In Australia ‘Colonial’, ‘CFS’ and ‘Colonial First State’ are trade marks of Colonial Holding Company Limited and ‘Colonial First State Investments’ is a trade mark of the Bank and all of these trade marks are used by CFSGAM under licence.Copyright © CFSGAM Services Pty Limited 2019. All rights reserved.
