Unfortunately, the headlines have become all too familiar. Month after month, we see new stories detailing the latest riches to rags tale in professional sports. Athletes who were once paid multi-million dollar contracts are struggling with debt and forced into bankruptcy. For most outside of the professional sports arena, it’s incomprehensible. How could someone who was paid so much lose it all so quickly?
According to reports, an estimated 60% of former NBA players are broke within five years of departing the league. And by no means are these problems confined to any one sport – 78% of former NFL players have gone bankrupt or are under financial stress just two years after retirement.
The financial challenges that plague professional athletes are not a new phenomenon. During my own 16-year NBA career, 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 path of a professional athlete is unique – earnings are often compressed into a few years during your early 20s – the lessons gleaned from the bankruptcies and the guardrails required for beating the odds are insightful regardless of whether you have $10,000 to invest or $10 million.
It’s your money, own it. The world of wealth management is filled with jargon, and unfortunately many financial literacy programs are not particularly user friendly. Despite these challenges, apathy and a poor grasp of financial terminology and products make many professional sports figures an easy target for deceiving friends, family members, associates, advisors and strangers.
While the benefits of hiring a professional financial advisor include access to deeper knowledge and expertise and a significant savings of time, putting blind faith into anyone without enough knowledge to understand the choices they are making on your behalf is an exercise in hope over experience.
Ultimately, the responsibility for making prudent financial decisions falls on your shoulders. 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 that threaten your future financial health.
Preserving your capital is as hard as obtaining it. At last look, approximately 9 out of every 10,000 high school seniors playing football will make the NFL. This statistic helps to underscore the tremendous amount of skill, sacrifice, talent and determination it takes to reap the financial rewards of making it to the pros.
However, even after overcoming these incredible odds, life after professional sports almost always arrives sooner than expected, and the commitment and dedication required to preserve capital over a retirement that could span 50+ years is a challenge for even the most disciplined of athletes.
Unfortunately, the power of compounding works both ways, and the gains required to recover from losses scale exponentially as they deepen. 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.
Bad investments or deals can wipe out a nest egg in the blink of an eye. The importance of avoiding unnecessary risks and learning to say no to excessive requests from family and friends cannot be stressed enough.
Risk and return are forever linked. If an investment or business opportunity sounds too good to be true, it probably is. 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” and “risk-free” opportunity.
The relationship between risk and return is everlasting – the higher the potential return of an investment, the higher the risk. Furthermore, your willingness to accept more risk doesn’t guarantee you’ll ever see a return.
To paraphrase Warren Buffett, Why risk what you need and have for what you don’t need?
Don’t worry about what your peers are invested in or how they live.
Lifestyle creep is a problem that knows no economic, educational or professional bounds. 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.
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. In 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.