Do Premium Bonds make sense?

zagfles

eskbanker said:

zagfles said:

eskbanker said:

zagfles said:

eskbanker said:

zagfles said:

PBs look like a no-brainer at the moment. Best easy access account according to MSE is 1.16%. PBs pay 1.4% mean, and 1.2% mean even if you ignore all the prizes above £25. Someone with £10k+ should get a regular flow of £25 prizes.

At the risk of taking 'regular' too literally, the return on PBs is anything but regular, especially at lower holding values.  According to the MSE PB calculator, a £10K holding has a roughly 1 in 3 chance of winning a prize in any given month, but anyone literally expecting a prize every third month will be disappointed, even though it should gravitate to that as a long-term average eventually....

Well, there's less than a 0.2% chance of not winning anything in a year, and only about 1.5% chance of only winning once a year. Over 90% chance of winning at least 3 prizes a year. So I'd say that was pretty close to "regular"...

Sure, it was an essentially semantic point I was making, i.e. that regularity isn't the same as frequency:

regular

adjective

1. arranged in or constituting a constant or definite pattern, especially with the same space between individual instances.
   
   "plant the flags at regular intervals"

   
   
2. recurring at uniform intervals.
   
   "a regular monthly check"

I'd got that a bit wrong because I used the monthly probability rather than each bond's probability - obviously there's the chance of winning more than one prize a month. Having a bit of time to waste for an intellectual exercise - I've now done it properly, using each bond's probability.

For a £10k holding the probabilities of the amount of prizes you win per year are:

0 prizes: 0.75%

1 prize: 3.65%

2 prizes: 8.95%

3 prizes: 14.61%

4 prizes: 17.89%

5 prizes: 17.53%

6 prizes: 14.31%

7 prizes: 10.01%

8 prizes: 6.13%

9 prizes: 3.34%

10 prizes: 1.63%

11 prizes: 0.73%

12+ prizes: 0.47%

So pedantry aside, I think that shows that with a £10k holding you'll get quite a regular flow of prizes.

With a £50k holding it's even more regular - there's virtually no chance you won't win anything, and a 97% chance of getting at least 10 prizes a year. 

There's obviously limited mileage in continuing to debate the meaning of the word 'regular' but yes, the stats are what they are - I think your presentation is an excellent illustration of the variability of the return though, in that even though the most likely outcome for £10K would be four or five prizes, on average it's only going to be 35% of holders that would actually see those specific returns, i.e. you'd have a 65% chance of not achieving a return of between 1% and 1.25% inclusive (excluding higher returns)!

Indeed - it's a bit like the fact that only 5% of babies are born on their EDD, yet the EDD is still used as a guide as to when the baby is likely to be born.

PBs are a gamble and as such the returns aren't guaranteed.  But there again nor is inflation - so the real return from even a fixed rate account is uncertain, probably to the same sort of degree.

Nothing like as much of a gamble as the stock market though - daily variability with stocks & shares are greater than the annual variability with PBs!

Richmc

OK putting this into real world perspective, you can consider PB's as a risk free investment with an element of fun thrown it, this is my history, at the moment I have £24,750 in bonds, over the last year I have had a return of £450 so currently running at about 3.8%, according to the calculator I should have seen a return of £250 so yes I am lucky!
About ten years ago I had £7,000 or so in PB's back then I was getting £25 and £50 wins, until one month when I scooped £50,000 and was able to become mortgage free, I like PB's

Zagfles, I have to contradict you, PB's have never been a "gamble", what casino would give you all your stake back when you left? You can say the returns aren't guaranteed that is true, but with enough bonds your returns should even out, unless you are unlucky.
Do I think PB's are worthwhile. Yes I do!

Richmc

I said what casino would give you your stake back, PB's are an investment not a gamble, and it's an investment with a very variable interest rate, no way are they a gamble because you can't lose anything, would you consider playing Russian roulette with knowingly an un loaded gun a gamble? I don't think so! Clearly PB's are not a gamble. 

Richmc

You obviously do not understand the concept of gambling, the point is you do not lose your initial investment like you would do if you went to a bookies and GAMBLED on a horse race. My god what has happened to IQ's

You can't lose what you have never had!

grumiofoundation

Richmc said:

You obviously do not understand the concept of gambling, the point is you do not lose your initial investment like you would do if you went to a bookies and GAMBLED on a horse race. My god what has happened to IQ's

You can't lose what you have never had!

You are correct if you define gambling as risking your initial stake.

The other poster is correct if you define a gamble as a non-guaranteed outcome. 

Cambridge dictionary defines gamble as:

to do something that involves risksthat might result in loss of money or failure, hoping to get money or achieve success:

From that definition premium bonds are a gamble since you are risking the guaranteed interest you would receive in a savings account. 

Richmc

But it's not a savings account it's an investment account and as always stated "value of investments can go down as well as up".
But as in endowment mortgages where people lost thousands, with PB you lose nothing.

zagfles

Richmc said:

OK putting this into real world perspective, you can consider PB's as a risk free investment with an element of fun thrown it, this is my history, at the moment I have £24,750 in bonds, over the last year I have had a return of £450 so currently running at about 3.8%, according to the calculator I should have seen a return of £250 so yes I am lucky!
About ten years ago I had £7,000 or so in PB's back then I was getting £25 and £50 wins, until one month when I scooped £50,000 and was able to become mortgage free, I like PB's

Zagfles, I have to contradict you, PB's have never been a "gamble", what casino would give you all your stake back when you left? You can say the returns aren't guaranteed that is true, but with enough bonds your returns should even out, unless you are unlucky.
Do I think PB's are worthwhile. Yes I do!

This thread seems to be descending into depths of pedantry and dictionary definitions...despite people clearly understanding how they work

OK put it this way. You have £10k. You could invest in NS&I income bonds which would pay out £115 a year in interest. You could spend that £115 on lottery tickets, fruit machines or go down the casino with it, and end up with nothing, or if you're incredibly lucky a million+. You still have the £10k original investment safe in NS&I. Is that gambling?

Or you could put the £10k into premium bonds. You could win nothing, or you could win a million. So exact same principle. Your original £10k is safe with NS&I and you could win nothing or a million in addition. If the above is gambling then so are PBs.

But PBs are clearly less of a gamble, as well as being better value. With PBs average (mean) win would be £140, median £120. If you bought lottery tickets with the income bonds interest, average win would probably be under half that.

Swipe

PBs are a no brainier if you are close to breaching your annual personal savings allowance. If you have a decent holding, they should easily outperform any cash ISA.