How to Best Invest Lottery Winnings
The real challenge facing most lottery winners is not going broke. Statistically, one in three big lotto winners will end up declaring bankruptcy within just three to five years of winning.
Investing your winnings wisely seems like the best way to avoid becoming a sad statistic—however, not all investments are created equal. For starters, billionaires like Warren Buffett and Mark Cuban point out that you should avoiding investing in industries you don’t understand and that you should never invest without assistance.
Here we break down how to best invest lottery winnings—with professional help, of course.
Keeping Your Lottery Winnings Safe
The first order of business after winning the lottery and collecting it anonymously is to put most of it away in a safe place. Putting a good chunk of your lottery prize into high-interest savings accounts is a good starting place to keep them safe while earning some interest over time.
Next, you can place some of your money into a low-cost index fund. An index fund (or mutual fund) is a portfolio of many investments taken from across a particular financial market index, such as the S&P 500.
Because the fund is made up of a cross section of the index, your investment will grow slowly and steadily along with the index. This will keep your money ahead of inflation and safe from rocky stock markets. The income from these safe investments should be enough to support a very comfortable post-lottery-win lifestyle.
Investing Lottery Winnings for Growth
Once most of your lottery money is safely stowed away in bank accounts and reliable funds, you may consider investing some of your cash for growth. Growth investing focuses on putting your money into stocks whose share prices are going to increase. With help from a financial advisor, you can buy into a growth-oriented fund that holds stocks in companies that are expected to grow faster than average compared to the market.
Growth stocks may include small, new companies that are expected to grow quickly and see a big rise in their stock prices. Alternatively, they can be well-known companies like Walt Disney (DIS), technology firms like LinkedIn (LNKD), and health and medical companies like Johnson & Johnson (JNJ) that show promising growth and staying power in the future.
Investing in a fund that focuses on companies from an expanding niche, such as environmental technology or vaccine development, will allow you to expand your lottery winnings by riding the growth wave of an entire industry.
Investing Lottery Winnings for Value
While growth investors focus on growing stock prices, value investors put their money into companies whose stocks are currently “undervalued” on the market—essentially buying those stocks “on sale.” Warren Buffett is probably the most famous value investor today.
The idea behind this strategy is that other investors tend to overreact to good and bad news. As a result, stocks often get “valued” above or below what they should be worth, based on historical factors such as the company’s financial stability, earnings, and growth potential. Value investors buy stocks when they’ve dropped in value with the expectation that they’ll grow in the future, paying out bigger and bigger dividends over time. This strategy rarely grows earnings by leaps and bounds, but it can beat the market many times over.
Some well-known value stocks include spice manufacturer McCormick (MKC), Microsoft (MSFT), and Berkshire Hathaway (BRK.A, BRK.B), the wildly successful business holding company run by CEO Warren Buffett.
Investing in Real Estate
If you love the idea of becoming a hands-on property baron after winning the lottery, then investing in real estate may be for you. There are many different ways to invest in real estate, and most of them need more management than a simple stock investment.
You can become a landlord by buying one or more properties and renting them out to tenants who live in them. Of course, you’d be responsible for property management and all sorts of taxes, which can get a bit complex, but there are reputable property management companies that can handle the first part and your accountant or financial advisor can help you manage and even set up automatic payments for the taxes.
Alternatively, you could buy properties when prices drop, hold onto them or rent them out while the market recovers, and sell them when home prices go up. Then there’s the option to “flip” properties by purchasing homes that are in bad shape, renovating them, and reselling them for a profit. While home renovation shows make this look easy, it takes a lot of planning and teamwork to get it right and make a profit.
For a more hands-off approach, you could put some of your lottery winnings into a real estate investment trust (REIT), which uses investors’ money to buy, operate, and sell rental properties. Usually these are commercial properties, and the funds pay out big dividends to their investors. Some REITs are big enough that they trade on the stock market.
However you choose to invest your lottery winnings, you should never invest without a financial advisor’s help. There is nothing more dangerous than a newly rich lotto winner throwing money at businesses and stocks they don’t understand. With proper guidance, you can keep the majority of your money safe growing steadily in a bank and invested in a strong and varied portfolio that won’t be destroyed by market drops.