By Panayiotis Constantinou, Contributor
As discussed in last week’s article, athletes strive for financial freedom – which is all about having the resources to afford their desired lifestyle. In many cases, this financial freedom is attained through investing – as investing can eventually make your money work for you. Investment can be defined as committing capital or funds to different types of assets with the expectation that you will generate a gain or profit in the future. However, there are several factors that can negatively impact athletes’ investment; one such factor is inflation. Inflation is the rate of increase in prices over a period of time which means it can affect the value of future returns, deeming it a critical factor when making investment decisions.
Since the beginning of 2022, inflation rates starkly rose on a global scale, which can serve as an outcome of post-pandemic increase in demand, in addition to the war in Ukraine. Athletes need to be well-informed before jumping on an investment venture. Specifically, they need to be aware of the risks they take when investing. One such risk is, as stated above, inflation. Inflation affects investment through decreasing the value of an asset or income as a result of the decreased value of the currency; it therefore causes the purchasing power of the investment return to decline.
In explicit terms, increased inflation would result in some assets that have fixed, long-term cash flows to underperform since the purchasing power of those future cash flows declines over time. Put simply, the amount of goods and services that can be purchased with $100 today will be lower in the future as a result of inflation. On the other hand, assets with more flexible cash flows might perform better and offer protection against inflation. Inflation affects different asset classes in several ways. For example, those with fixed long-term cash flows will see their purchasing power eroded, whereas investments with adjustable cash flows could outperform.
There are several cases of athletes that made uninformed and uneducated investment decisions that led to the loss of capital or funds, with examples like former Miami Dolphins quarterback legend Dan Marino losing as much as $14 Million to a ‘bad investment’ in 2012. Significantly, the beginning of 2012 was scarred by an economic crisis that happened the year before, which led to high inflation rates, resulting to the aforementioned unsuccessful investment.
It is therefore of paramount importance, that athletes have the knowledge that will form the basis of an effective investment strategy. Through gaining such knowledge, athletes will be far more able to create a solid and as much as possible inflation-averse investment plan. However, as well as knowledge in the field of investment, athletes need to be aware of the importance inflation plays when it comes to investing. It is therefore vital for athletes to seek financial advice as there are many advisors who will provide them with the support, guidance and knowledge they need to build an effective long-term investment plan, and protect themselves from financial downturns caused by the prevailing economic conditions.
To conclude, when inflation levels rise within an economy (be it global or domestic), it is crucial for athletes to have the ability to incorporate that risk in the decision-making formula, as investing in itself is considered risky; investing while there is inflation, deems it far riskier. Therefore, while athletes are more than encouraged to invest, more attention should be given to how and when (timing) they should invest, in order for their investment to be successful and their money to ‘work for them’.
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 protected].
