newbie,couple of premium bond questions

Putting money in the stock market is like putting money on a horse race, excpet you win if your horse keeps moving forward.

"Andy Pandy" wrote

Nah - spend enough, and you can practically guarantee **losing half of it** !!

Yes, but otherwise it's totally different, because you lose the money you pay for your lottery entry or scratchcards. All you lose on PBS is the difference between the 3% tax-free average payout and what you would get in interest from a secure money interest account. At current interest on savings accounts, that means that with £30,000 of PBs you are betting about 1% (£300) pa on getting a bigger prize

Toom

Not all of it, that was the point, if you're going to assume a steady stream of smaller premium bond prizes to make your "average payout" then you need to account for the same with the lottery, etc. About 25% of lottery ticket costs go in 10 and match-4 prizes, so you're only gambling 75% of your stake on winning a big prize.

Even under that criteria - someone who spends 30 a month on the lottery is betting less, and has a greater chance of winning the jackpot.

"Andy Pandy" wrote

... and a *lower* chance of winning (say) 50 each month.

Put the money in a high interest account.

Depending on how much invested, take the weekly, monthly, etc interest to the casio once per week, month, etc.

Put all the chips into your left pocket.

Slowly gamble them on the roulette wheel - it doesn't matter what bet you make. (For more sophisticated strategies below you'll want to tweak your bets to get the jackpot you want. IIRC the multipliers are 2 or 3 so your jackpot has to be initial bet*2^N*3^M for arbitrary choice of N and M)

Every time you win put the winning chips (including the initial bet) in your right pocket.

Once your left pocket is empty cash in whatever is in your right pocket and go home. Pay your winnings into the high interest account.

As long as you aren't exceptionally unlucky you will get 95%+ of the interest you would have got anyway and you might even have managed to get free drinks out of the casino.[1]

If you want the potential returns to be bigger then you can re-bet your winnings once (or twice etc)

If you want a spread of wins (like the premium bonds/lottery) then have a certain amount (of the interest you take in) you only bet once, a certain amount twice, three times etc. You'll almost certainly hit floor limits for very big wins so a bit of planning is required.

You can use this strategy to get a jackpot the size of a lottery jackpot with much better odds - start with a 1GBP bet and then bet everything on red or black 22 times for a 4.2M payout with odds of 1 in 7.7 million. - you'll probably have to change casinos and probably have to make the last few bets in 'vagas[2] so a small amount of your stake will have to be used to fly you there

[1] Does this happen? With this strategy and say 5.25% interest on 30000 the casino will win about 50GBP/year from you[3]. I can't help feeling that if you go every week with 30GBP and take home 29GBP then they aren't going to feel too great about giving you free drinks. OTOH, if you go once a year with 1500 and leave with 1450 they're not going to begrudge the drinks for one night. [2] Average returns aren't quite as good, 18/19 rather than 36/37 for each bet. And I don't know what the tax situation would be if you did win. [3] Ignores tax on the interest.

Tim (who's never bought a lottery ticket, never been in a casino, and doesn't own any premium bonds)

Try reading the thread and comprehending the point. The 50/100 wins are already included in the 3% average payout quoted by Toom.

"Andy Pandy" wrote

Perhaps you should try thinking harder yorself! [See below.]

"Andy Pandy" wrote

No, not necessarily all of them - only the *average* number of 50/100 wins are "already included in the 3%". If you win one more 50 prize than expected, then that's *extra*.

@bt.com...

No.

If I have 10000 in premium bonds (and assuming a non tax payer) I'm effectively gambling about 500GBP per year (the interest I could get in a high interest account) and winning about 300GBP per year on average. For a higher rate taxpayer, on average, I win my stake.

If I gamble that same 500GBP/year on the lottery I'll win around

250GBP. Infact for most people it will be a lot less than that because the big prizes are a significant proportion of the prize money. (over 50% of the prize money after the 10GBP winners are deducted goes to the jackpot winners) If you only count the 10GBP prizes (the only ones that are a guaranteed payout) then you'll win about 100GBP on average in a year.

Tim.

What if you win one less?

Stop squirming and admit you were wrong. You said "50 each month". We've already accounted for that.

Yes. You've missed the point too.

Actually about 350 if you include the big prizes. (Current rate is 3.55%)

We weren't comparing gambling *the whole amount* of interest on the lottery with the premium bonds. We were comparing the amount you are gambling on *big wins*, having taken average you should get in small wins out of the equation.

Toom's point was that with PB's you can practically guarantee a return of around

3% if you have a large investment, as you'll get a steady stream of 50 and 100 wins. He compared that with a savings account paying 4% net, and argued that he is only really gambling 1% on winning a big prize.

To compare with the lottery, I argued that about 25% of lottery ticket costs goes to pay small wins (10 and match-4's), which like PB's the law of averages says you'll almost certainly get about your fair share if you buy enough tickets over the long term.

So the comparison is between:

a) Someone who buys 30,000 of premium bonds; and

b) Someone who puts 30,000 into a saving account paying 4% net interest, and buys

30 of lottery tickets every month.

Person a) will get 900 a year on average in small wins and is gambling 300 (the extra interest he could have got) on a big win.

Person b) is getting 1200 in interest a year and spending 360 on lottery tickets, of which he'll get about 90 back in small wins, so he'll get 930 a year net and is gambling 270 on a big win.

So person b) is 30 better off.

Also the odds of actually winning the jackpot are, for person a) 1/45130, for person b) 1/38844. The PB jackpot is 1million, think the average lottery jackpot is greater than 1million.

Not sure what the odds are for the lower prizes, I'll that to someone else to work out on the off chance anyone actually cares.

I should have such problems...

Regards,

Yup. Or bet on a 6 horse accumulator. Much better odds than PB's or the lottery.

"Andy Pandy" wrote

NO - we haven't! Stop squirming and admit you mis-interpreted what I said.

I see where you are coming from now but I disagree with your reasoning. However, this is getting a bit subjective.

I think you should only include the prizes you expect to win on average over the period you expect to hold the bond.

I disagree. We are gambling the whole interest. As two extremes of luck, my grandmother had 10K of premium bonds and won absolutely nothing for 12 months. And a friend of mine managed a match 5 on the lottery (and only won about 2k).

year net and is

Just for the record, your comparison breaks down for a higher rate taxpayer then.

At 360/year on the lottery you would expect one match 4 in every three years. So your payout in a year is 17.5% rather than 25%.

On 360GBP I would expect 6 match3 wins and nothing else giving a win of

60GBP.

On 3 years (1080) I would expect 19 match3 and 1 match4 for a return of

265GBP.

pot is greater

2.3 million

Match 3 - 1 in 57 - payout 10 Match 4 - 1 in 1032 - payout 73 Match 5 - 1 in 55491 - payout 1795 Match 5+bonus - 1 in 2330636 - payout 120632 Match 6 - 1 in 13983816 - payout 2352328

For all but the match 3 the payouts assume that an average number of payouts occurred in each category. Tim.

The match-5 is outside the small wins we're taking as read. The 10k over 12 months in PB's winning nothing is about 1/148 against, and over the longer term this'll almost certainly average out.

Yup, assuming the HRT payer doesn't have room in his ISA, or doesn't have a spouse in whose name he can invest. A non taxpayer of course would be able to get over 5% and so would be considerably better off than person b).

The whole assumption here is long term averages....

Which is 24.5%. Pretty close to the 25% I quoted.

On that basis, person b) is 2 a year worse off than I quoted - so about 28 a year better off than person a).

OK, so person b) has a better chance of winning a jackpot of over twice the size, having "gambled" less!

And for PB's it's per bond per month:

500 - 1 in 4,903,196 1000 - 1 in 14,709,588 5000 - 1 in 182,547,640 10,000 - 1 in 369,244,090 25,000 - 1 in 928,385,142 50,000 - 1 in 1,805,193,333 100,000 - 1 in 3,610,386,667 1,000,000 - 1 in 16,246,740,000

Multiplying those by our "stakes" per year as above (ignoring small wins as they're already accounted for):

Lottery:

1 in 154 to win 1795 1 in 6474 to win 120632 1 in 38844 to win 2.3 million.

PB's:

1 in 14 to win 500 1 in 41 to win 1000 1 in 507 to win 5000 1 in 1026 to win 10,000 1 in 2579 to win 25,000 1 in 5014 to win 50,000 1 in 10029 to win 100,000 1 in 45130 to win 1,000,000

So you can see that the lottery strategy is much more likely to win you a big prize (100,000+), but the PB's are much more likely to win you a mid-range prize (mostly

500-1000).

So, now to work out which is better value.

Dividing the wins above by the probability to arrive at an average per year:

Lottery: 90 per year.

PB's: 132 per year.

Then account for the fact the lottery strategy costs 28 less per year, and it's very close, but PB's win by 14 a year! But there'll probably be loads of rounding errors in that calculation....

This makes sense, because the quoted PB interest rate is 3.55%, and the lottery only pays out about 50% of stake money.

So one would expect that if you invest in a savings account paying 4% net and spend about 1% of the interest on lottery tickets, as a long term average you'll approx break even with someone who invests in PB's at 3.55% average payout.

Unfortunately the 3%+ "average rate" of return does not always work. I have 20k worth of premium bonds which have yielded a pathetic £150 this year - 3 x 50 pound prizes. I really thought this month might end the drought and give me a bit of extra Christmas money but to get nothing - again - felt like a real kick in the teeth.

As future results are in no way affected by past outcomes, there is also no guarantee of a "positive correction" on this in the future.

My faith in premium bonds is fast receeding.

If you pay tax at 40% premium bonds beat esavings:

3.55% is larger than 0.6* 5.03%

Robert

Well, that's the way the cookie crumbles, or the way the lore of averages works. For everyone whose results this year were above average, there must be someone like you.

While there are indeed no guarantees, in a way future results *are* affected by past outcomes, inasmuch as you can expect your personal average, over time, to get closer and closer to *the* average the longer you wait. Accordingly you should get some above average results "any year now".

Faith? Who told you they were a god? Be patient, my child.