Bonus Bonds – Is it investing or gambling?

Bonus Bonds is a savings scheme that was set up by the government in 1970 to encourage people to save more. Basically investors put money in, and in return they get the chance to win up to $1 million in a monthly prize draw. Bonus Bonds was the second type of investment I ever made – previously I had only invested in bank deposits and was excited to have something new to diversify my portfolio. Even more exciting was the prospect of becoming a millionaire each and every month!

Does the thrill of the prize draw and the opportunity to win $1 million every month make Bonus Bonds a worthwhile investment? Or is it just gambling?

How Bonus Bonds work

The Bonus Bond scheme is an investment fund in disguise. The fund invests your money in conservative assets such as government bonds and bank deposits. These days the scheme is run by ANZ, and you can join by visiting an ANZ branch. Bonus Bonds have a minimum investment amount of $20, and you can withdraw your money at anytime. There is currently over $3 billion invested in Bonus Bonds.

where Bonus Bonds are invested
The fund invests in conservative assets like bank deposits and government bonds

While normal investment funds distribute any returns to investors proportionally to how much they have invested, Bonus Bonds distributes its returns to investors randomly as prizes. To facilitate this, a monthly draw is held where each dollar you have invested, gives you one chance to win a prize. Prizes on offer each month are the big $1 million, $100,000, and $50,000 prizes, and various smaller prizes between $20 and $5,000.

Bonus Bonds prize draw
Prizes won in the June 2019 prize draw

This meant that every month you could win some life changing amounts of money. And if you didn’t win, your money still stays invested in the scheme for future prize draws, so it was safer than buying Lotto tickets. ANZ markets this as “The much more fun investment”. This got me hooked, and as a teenager, any birthday or Christmas money I received was invested into my Bonus Bonds account.

Imagine getting the call to say you’ve won $1 million

The numbers

We can see that the Bonus Bonds scheme is part investment fund, and part lottery. So let’s look at some numbers to see how they stack up:

  • Overall returns of the scheme to see how they compare to similar investments
  • The scheme’s management fees
  • The odds of winning a prize in Bonus Bonds, compared with Lotto

Overall returns of the scheme

First, I’ll look at how the performance of the Bonus Bond scheme is overall. Looking at the Bonus Bonds Product Disclosure Statement (PDS), the scheme returned 1.34% (after fees and tax) to investors in the year ending 31 March 2018. This return rates poorly compared to similar investments like the AMP NZ Cash Fund returning 1.55%, and the AMP NZ Fixed Interest Fund returning 3.17% in the same time period. Even term deposits do better, as you can currently earn over 3%.

And because the returns of Bonus Bonds are distributed randomly, the majority of investors would have received returns below 1.34%, as the returns are skewed towards those who win big prizes.

Bonus bonds returns
Bonus Bonds prizes and returns

In addition, the scheme’s performance is getting worse over the years as interest rates fall. Even more concerning is that the rate of return is now lower than the rate of inflation (roughly 1.5% in NZ), so keeping your money is Bonus Bonds is resulting in your money eroding away.

Fees

Now let’s look at the management fees and expenses of the scheme. Looking at the PDS, we can see it’s a whopping 1.23%. I’d consider this a rip-off as funds investing in conservative assets like cash and bonds usually charge much less e.g. The AMP NZ Cash Fund charges 0.27%, AMP NZ Fixed Interest Fund charges 0.57%, and term deposits have no management fee. That helps explain why the returns of the scheme are so low, as almost half of the scheme’s return is eaten by fees.

Bonus Bonds fees
Bonus Bond scheme fees

Chances of winning

We’ve established that Bonus Bonds is a poor performing investment compared to some of the alternatives. But does the prize draw and the chance to win $1 million make up for it? Let’s examine the chances of winning a prize in each monthly prize draw.

For most prize draws over the next year, we expect that the chance of any Bonus Bond winning a prize will range between 1 in 25,000 and 1 in 50,000

Bonus Bonds

Bonus Bonds have stated that the odds of winning a prize for every dollar invested is 1 in 25,000 in the best case, and 1 in 50,000 in the worst case. In 2018, the odds were 1 in 26,875. In the table below we have the odds of winning for four different amounts invested, under the best and worst cases, and the 2018 odds:

Amount investedBest Case (1 in 25,000)2018 odds (1 in 26,875)Worst case (1 in 50,000)
$201 in 1,2501 in 1,3441 in 2,500
$1,0001 in 251 in 271 in 50
$10,0001 in 2.51 in 2.691 in 5
$50,000Expect 2 prizesExpect 1.85 prizesExpect 1 prize

These odds suggest you can expect to win a prize every few months if you have a decent amount invested.

However, almost all the prizes are amounts of $20 (97.7% in the June 2019 prize draw). So in the table below we have the odds of winning a prize larger than $20:

Amount investedBest Case (1 in 25,000)2018 odds (1 in 26,875)Worst case (1 in 50,000)
$201 in 54,3481 in 58,4351 in 108,696
$1,0001 in 1,0871 in 1,1741 in 2,174
$10,0001 in 1091 in 1171 in 217
$50,0001 in 21.71 in 23.41 in 43.5

No wonder I never won anything more than $20! Even with $50k invested, your chances of winning a prize greater than $20 is fairly slim.

Next we have the odds of winning the big $1 million prize (assuming $3.3b units in distribution):

Amount investedProbability of winning
$201 in 165 million
$1,0001 in 3.3 million
$10,0001 in 330,000
$50,0001 in 66,000

Not likely at all, even with $50k invested! Imagine getting picked as the single winner out of two Westpac Stadiums full of spectators.

Lastly, let’s take a look at the odds of winning 1st Division in Lotto (where the prize is typically $1 million) for comparison:

Amount spent on ticketsProbability of winning
$201 in 137,085
$1,0001 in 2,687
$10,0001 in 269
$50,0001 in 53.7

We can see than even winning Lotto is easier to come by than winning the big one in Bonus Bonds! (although with Bonus Bonds investors get their invested money back, while Lotto players don’t).

Are Bonus Bonds a worthwhile investment?

Based on the numbers, I don’t think so. The returns (and the resulting prize pool) are too low, and the fees are too high compared to other types of investments. If this was a normal investment fund, it would not be a good deal at all for investors. The odds of winning aren’t great either, with the chances of winning a decent prize being pretty much zero (and even lower than winning Lotto!)

But surely there must be a reason why there’s a enormous $3.3 billion “invested” in the scheme. Like what about the chance to become a millionaire each and every month?

Well, over the years I’ve learnt that investing is about putting your money into sensible assets and watching it grow over the long-term. Investing is not about getting rich quickly. Getting rich quickly is what gambling is for, but that is much more likely to lose you money. And that’s what I was doing with Bonus Bonds – I was holding onto hope that I could perhaps win the $1 million, and as a result I was letting my money erode away to inflation, and paying the opportunity cost of not investing in more profitable assets like shares.

Therefore, I sold half my Bonus Bonds 2 years ago, and just sold the other half earlier this year. I admit it was a hard decision for me to sell the last of my Bonus Bonds because I had FOMO – the Fear Of Missing Out on that potential $1 million prize, even when the chances of winning were so minuscule. Although Bonus Bonds may have helped me develop good savings habits as a teenager, I can now say that my money is invested somewhere that is slowly and steadily contributing to making me rich in the long-term.

Casino photo credit – Lidia

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Disclaimer

The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.