By Demetris Constantinou, Contributor
Halfway through 2022, it has become impossible to scroll through social media and news pages and not encounter the terms “recession”, “inflation”, “bear market” and other similar takes, expressing negative sentiment on the state of the world economy. It’s no secret that while the world economy is still strong, the signs of a looming recession become more prevalent by the day with big names such as JP Morgan’s Jamie Dimon talking about an “economic hurricane on the horizon”.
All major U.S. Stock Market indexes, the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite have fallen into “bear market territory” meaning that they have all fallen by 20% or more from their yearly highs within a short time. To top all the above, recent studies have shown that consumer sentiment, which is the greatest driver of economic growth in the U.S., has reached lows that “haven’t been seen since 1981, during the Great Recession.” Despite all the volatility and negative sentiment in the current economic environment, athletes should not be discouraged from pursuing various investment options and keeping a diversified portfolio. On the contrary, such times of uncertainty tend to create new opportunities for people with cash reserves and professional athletes are usually amongst the groups with the highest availability of cash at hand.
In this article, we will explore investment options in the current economic climate and try to understand the risks and rewards associated with each option. While some options are more conventional than others, our goal is not to re-invent the wheel but rather dig deep into the fundamentals and discover what the different investment options have to offer to athletes.
Starting with a low/no risk and low return option, high-yield savings accounts and certificates of deposit are a great way of investing a certain portion of your money that you’re not willing to lose. Simply put, the above options will rarely provide a return that’s greater than 3-4% but your money is pretty much guaranteed, unless you bank with unreputable institutions. High yield savings accounts don’t have a catch but will rarely earn you an interest rate above 1.5-2% and certificates of deposit will usually require you to lock your money for a certain period and earn a return after that period expires. The longer the period, the higher the return, while the risk remains negligible. Neither of the above will make your wealth grow exponentially but both options are very solid when it comes to safeguarding your money and earning a small, guaranteed return, something that doesn’t seem too unattractive during periods of economic downturn.
Moving on to moderate risk options, index funds are the most famous form of investment that help one achieve long term growth with fairly low downside potential in the long run. While index funds have undergone great corrections over the past few months, they are a great option for individuals who seek to grow their money and tap them in 20, 30 or even more years down the line. Since the inception of the S&P 500 index, the average annualized return through December of 2021 is 10.49%. This doesn’t necessarily mean that every year, your money would grow by 10.5% but rather that on average, over a long period of time, your average yearly return is 10.5% with various ups and downs throughout the years. Such performance over the long run makes index funds very lucrative for athletes who seek to grow their wealth without being willing to take huge risks with their money.
Given the current correction in the stock market, athletes could even get into index funds at cheaper prices which can potentially lead to greater returns and more upside potential. Overall, what makes index funds moderate risk options is that they’re a bundle of individual stocks, meaning that any risk associated with individual stocks is gone and as long as the economy does well, the index funds will likely do equally well.
On the contrary, individual growth stocks pose higher risk but could achieve very high returns if the underlying company performs well. Growth stocks are our higher risk, high return option which should only be pursued with the help of financial advisors. Traditional growth stocks, mainly in the technology space, have suffered huge losses over the past few months and could potentially pose great opportunities to “buy the dip” and jump in at cheap valuations. Specifically, stocks like Meta Platforms Inc (NASDAQ: META) which has been at the forefront of growth stocks over the past few years, has suffered a 50% drop over the past six months and Amazon.com Inc (NASDAQ: AMZN), a stock whose growth has been phenomenal over the years, has also seen a 36% drop over the past six months. The point here is not to say that these two stocks will certainly go up, but rather that traditionally well performing individual stocks have suffered some great losses over the past few months and could have great upside potential, especially for athletes with high cash reserves.
In summary, the investment options outlined above are by no means the only investment options out there. Not only did we not tap into some least conventional options such as private enterprise, but we skipped one of the most popular options out there which is the real estate market. The general theme in the current economic climate is to exercise caution and to look out for opportunities and cheap valuations while at the same time keeping a diversified portfolio that encompasses a healthy mix of low to moderate, or even high-risk investments, all with the prospect of a solid return on the athlete’s investment capital. The specifics of what each athlete’s portfolio should look like are to be decided between the athletes and their financial advisors, depending on the athlete’s risk appetite and future goals with an eye on the current economic climate and volatility.
The Money Smart Athlete® Blog is established and run by the Sports Financial Literacy Academy® (SFLA). Through its education programs, the SFLA has the vision to financially educate and empower athletes of all ages to become better people, not just better athletes. For more information on our courses, our SFLA Approved Trainer Program®, and how they can benefit you and your clients, please get in touch with us at email@example.com.