March money madness: Hard-won wisdom from the experience of professional athletes
It’s one thing to lose a few dollars in a friendly March Madness wager. It’s quite another to go from riches to rags as a professional athlete. But all too often, we hear about star athletes who were once paid multi-million dollar salaries struggling with debt and bankruptcy. According to Sports Illustrated1:
- 60% of former NBA players go broke within five years of departing the league
- 78% of former NFL players have gone bankrupt or are under financial stress two years after retirement.
For those of us outside of the world of professional sports, it seems incomprehensible. How could someone who was paid so much lose it all so quickly?
“The financial challenges that plague professional athletes are not new,” says Chris Dudley, a Senior Wealth Advisor and Director of Boston Private's Sports & Entertainment Division. Dudley has a unique insider’s perspective. During his 16-year NBA career, he says, “I saw teammates and competitors making far more money than I did lose it all to bad investments, financial schemes, dishonest or unqualified advisors, and reckless spending.”
While there’s no question that the career paths of professional athletes are unique—and earnings are often compressed into a few years during their early 20s—there are still important lessons to be learned from their experiences. Here are four that Dudley gleaned from athletes who successfully beat the odds, but, “they are instructive for everyone, regardless of whether you have $10,000 or $10 million to manage.”
1. It’s your money, own it.
The world of wealth management is filled with jargon, and many financial education programs are not particularly user-friendly. That’s unfortunate, Dudley says, because the kind of disinterest and poor grasp of financial products and terminology that many professional athletes have can make them an easy target for the schemes of friends, family members, associates, and advisors, as well as strangers.
And while there are benefits to hiring a professional financial advisor—including access to deeper knowledge and expertise, and significant time saving—you want to be careful about putting blind faith in anyone without confirming their credentials, experience, and ability to act on your behalf. Otherwise, “it’s an exercise in hope over experience,” he believes.
“Ultimately, the responsibility for making prudent financial decisions falls on your shoulders,” stresses Dudley. “Read your statements, ask questions, and pay attention to how your money is being invested and spent. The more informed you are about your finances, the more empowered you’ll be to avoid the missteps and miscreants who threaten your future financial health.”
2. Preserving your capital is as hard as earning it.
Approximately 8 out of every 10,000 high school seniors playing football will make the NFL2—a statistic that underscores the tremendous amount of skill, sacrifice, talent, and determination it takes to make it to the pros.
But even after overcoming these incredible odds, life after professional sports almost always arrives sooner than expected. That’s why the commitment and dedication required to preserve capital over a retirement that could span 50+ years becomes a challenge for even the most disciplined athletes.
That’s also why Dudley stresses the importance of avoiding unnecessary risks and learning to say no to excessive requests or advice from family and friends. “Bad investments or too-good-to-be-true deals can wipe out a nest egg in the blink of an eye,” he cautions.
“Unfortunately, the power of compounding works both ways, and the gains required to recover from losses scale exponentially as they deepen,” he explains. For example, losing 20% in an investment requires a return of 25% just to break even, losing 30% requires a gain of 42.9%, and losing 50% requires a gain of 100% just to get back to where you started.
3. Risk and return are forever linked.
If an investment or business opportunity sounds too good to be true, it probably is, Dudley cautions.
“When you dig deeper into the financial failings of many professional athletes, a common denominator is often a sizeable investment in a car dealership, restaurant, real estate development, or record label that was once presented as a ‘fail-proof’ or ‘risk-free’ opportunity.”
The relationship between risk and return is inescapable—the higher the potential return of an investment, the higher the risk, he reminds us. “Furthermore, your willingness to accept more risk doesn’t guarantee you’ll ever see a return,” says Dudley. Borrowing from Warren Buffet, he cautions: “Why risk what you need and have for what you don’t need?”
4. Don’t worry about what your peers invest in or how they live.
Lifestyle creep is a problem that knows no economic, educational, or professional bounds, according to Dudley. “In a world that runs on instant gratification and on-demand expectations, subtle and not-so-subtle increases in monthly spending are as common as $10 lattes.”
There’s also no upside to worrying about what might be in the portfolios of friends or family members. Today’s lottery-like IPOs and can’t-miss stocks that dominate cocktail party chatter become tomorrow’s laggards in the blink of an eye.
“An unfortunate reality for many professional athletes is that they become a target the day they sign their first contract and their salary is published on the web and in newspapers across the globe,” says Dudley.
And, while these circumstances create their own set of unique challenges, athletes don’t have a monopoly on apathy, poor financial literacy, or excessive risk-taking and spending. By taking a cue from the lessons behind the many high-profile bankruptcy headlines, a much broader universe of investors can protect, increase, and enjoy their wealth.
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1 - Sports Illustrated, 3/23/2009. “How (and Why) Athletes Go Broke” https://www.si.com/vault/2009/03/23/105789480/how-and-why-athletes-go-broke
2 - CBS Money Watch, 4/4/2011. “The Odds of Playing College Sports” https://www.cbsnews.com/news/the-odds-of-playing-college-sports/
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