So you didn't win the lotto. Now what?

It's time for a more realistic Plan B.

By Motley Fool Pick of the Day Apr 2, 2012 3:35PM

By Dan Caplinger


If you happen to be one of the winners of the Mega Millions jackpot from over the weekend, then by all means, skip the rest of this article. But for the rest of us losers -- which sadly includes yours truly -- it's time to get real about coming up with a plan for financial security that doesn't involve a 175 million-to-1 long shot.


Looking for the easy way out
I've got nothing against throwing away a dollar or two for the chance at winning millions. After all, it's not every day that you get a chance at a nine-figure payday -- and just the entertainment value alone of pondering the impact that a $640 million jackpot could have is worth something.


But for some players, there's clearly more going on than simple entertainment. Stories about people buying hundreds or even thousands of dollars' worth of lottery tickets are everywhere. And while some of those big spenders include sports celebrities who can afford to part with the cash, others appear to be making their wagers as their only hope of ever being financially secure.


That phenomenon is a symptom of the failure of most Americans to become financially adept. Most successful investing doesn't involve quick payoffs or big gambles but rather slow and steady gains that eventually add up to substantial wealth. That may not be very exciting, but your odds of success are a whole lot better than with picking five numbers out of a big hat.


Investing is not a lottery
In addition, on the surface, investing may seem like just another version of a lottery. Some stocks make people rich, while others lose all their value and leave their shareholders penniless.


But the vital difference is that it isn't chance that makes one company succeed while others fail. By looking closely at businesses and their prospects, you can create educated opinions about their future performance. You won't always be right -- but it won't simply be a shot in the dark.


Perhaps more important than that, with the lottery, there's only room for one winning set of numbers. But even within cutthroat industries, shareholders don't have to worry about only one stock proving to be a winner. Consider:

  • Coca-Cola (KO) and PepsiCo (PEP) have had a soft drink rivalry that has raged for decades. Yet when you look at their returns over the past 30 years, what's striking is how both of them have produced annual returns of 15% or more. Coke did it by focusing on its core drinks while Pepsi diversified into snacks, but both found ways to succeed.
  • Similarly, IBM (IBM) and Apple (AAPL) were once on opposite sides of the same field, with IBM's PCs facing off directly against Apple's Mac lines. But over the years, IBM has moved away from its former hardware emphasis to add substantial exposure to IT services, while Apple has moved more heavily into consumer electronics and related services. Both philosophies proved to be huge winners, and both stocks have performed impressively over the past 20 years.
  • Now that doesn't mean that every stock will be a winner. Collectively, investors have lost trillions of dollars investing in companies that proved not to have what it took to stand up to the competition. But the fact that even broad-based investments like stock index funds have produced sizable long-term gains shows that you can succeed in putting together a financial plan for a prosperous retirement without finding $640 million by the side of the road.

Get rich slowly
Rather than worrying about my 175 million-to-1 shot, I'm planning to use lottery-mania as an excuse to look into Scientific Games (SGMS), a company that actually produces lottery tickets. Just as betting on the house is a smart bet with casinos, those companies that help make it possible for lottery players to accept their losing propositions look like a reasonable place to look for possible gains -- especially if online gaming takes off.


But my main point is that if you're counting on the lottery to help rescue your finances, there's a better way. Take a step back and figure out what you can do to turn your resources into a realistic financial plan. It may be difficult, but you're much more likely to get the results you want.


Fool contributor Dan Caplinger picked some numbers but saved himself the dollar to play them. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Coca-Cola, and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Apple, and Coca-Cola, as well as creating a diagonal call position in PepsiCo and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you a winner every time.

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