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Last year (in the good times) I was investigating Bonus Bonds as an alternative to what was threatening to become an expensive Lotto habit. Fortunately the big jackpots stopped long enough to kick it, and I never got around to calculating the actual odds of getting a return on the investment. Today the Herald has done some of the work for me.
Bonus bond money is invested in low-risk (= low return) assets, with the prizes dependant on the return, and the ANZ takes a 1.3% chunk of the (currently ~$2.5 billion) fund (not the return) as a management fee, which reduces the available prizes even further as some of that money has to cover the hole.
I note that the Herald's comparison is a bit off - minimum investment is $20 so they ought to compare with a $20 lotto ticket but it won't change the odds much. Better yet calculate the odds of winning with one $6 ticket a week for four weekly draws ($24) versus $24 of bonds in one monthly draw. Then allow for those bonds giving you 12 draws in a year.
This is the point at which it sounds like you're guaranteed to win something sooner or later, especially if you keep putting money in (like the amount you'd otherwise spend on Lotto). The average return to an individual was 3.25% last year - then you realise that number is horribly horribly skewed by the big prizes.
Approximately 1 million New Zealanders own Bonus Bonds - the vast majority loose money year after year as inflation eats away at the real worth of their investment. Maybe not $24(+) a month, but as a savings vehicle there are better low-risk options, like any 'high'-interest savings account.
As a financial investment the adage holds true - the best way to make a small amount of money is to start with a large amount of money.
As an alternative to the dream of Lotto (which is what most people are actually buying with their ticket) - the prizes aren't as big, the draws aren't as often, but you don't miss out on your fix if you can't afford to spend the money this month, and one day you might decide that you've accumulated enough money there to do something nice with by itself.
In reality, the mathematical odds of winning a big prize aren't rosy. For each Bonus Bond, your chance of winning the monthly $1 million prize is one in 2.6 billion.
In fact, if you own $6 worth of Bonus Bonds, your chance of winning the $1 million prize is 11 times worse than your chance of winning first division Lotto using a $6 ticket.
You're more likely to win a smaller cash prize, ranging from $20 to $50,000, but the odds are never greater than one in 9660.
Bonus bond money is invested in low-risk (= low return) assets, with the prizes dependant on the return, and the ANZ takes a 1.3% chunk of the (currently ~$2.5 billion) fund (not the return) as a management fee, which reduces the available prizes even further as some of that money has to cover the hole.
I note that the Herald's comparison is a bit off - minimum investment is $20 so they ought to compare with a $20 lotto ticket but it won't change the odds much. Better yet calculate the odds of winning with one $6 ticket a week for four weekly draws ($24) versus $24 of bonds in one monthly draw. Then allow for those bonds giving you 12 draws in a year.
This is the point at which it sounds like you're guaranteed to win something sooner or later, especially if you keep putting money in (like the amount you'd otherwise spend on Lotto). The average return to an individual was 3.25% last year - then you realise that number is horribly horribly skewed by the big prizes.
Approximately 1 million New Zealanders own Bonus Bonds - the vast majority loose money year after year as inflation eats away at the real worth of their investment. Maybe not $24(+) a month, but as a savings vehicle there are better low-risk options, like any 'high'-interest savings account.
As a financial investment the adage holds true - the best way to make a small amount of money is to start with a large amount of money.
As an alternative to the dream of Lotto (which is what most people are actually buying with their ticket) - the prizes aren't as big, the draws aren't as often, but you don't miss out on your fix if you can't afford to spend the money this month, and one day you might decide that you've accumulated enough money there to do something nice with by itself.
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Date: 2010-01-24 07:59 am (UTC)From: