Money Smart Athlete Blog

Athletes and Investment Basics

Apr 14, 2021 | Financial Literacy

By Constantinos Massonos, Contributor

The reward for athletes who reach a top level in their sport, does not only come in the form of public recognition and a display case full of medals. Most professional athletes are privileged with earning what an average person earns in a lifetime, in just a few years. Many will squander this money away in a short time, but others will make the right decisions, including investments, that will allow them to retain their financial freedom and security after their retirement.

The core concept of investing, is putting your money to work for you by buying assets that you believe will go up in value, such as stocks, precious metals, real estate and others, and use the income generated from them to support the lifestyle you want to follow. The catch is that these assets do not always increase in value, so there is a risk of losing some or all of the money you have invested.

And while high-earning athletes might have an abundance of capital available for investing in comparison to their lower-paid colleagues, that doesn’t mean they don’t have to take the same important steps to become prepared to dive into investments.

Everyone, no matter their financial status, should have a financial plan in place that at least includes a budget and a savings plan. After building up an emergency savings fund that can cover your basic expenses for a few months, in case your income sources dry up, you can start putting aside risk capital. Risk capital is money that you can afford to lose without putting yourself in dangerous financial circumstances. If you already have debts, your focus should be to pay them off before starting to invest.

As an athlete you should already have a team of trusted advisors around you, people who have contributed to your success, such as your agent or  a legal advisor. Before investing, you should consider adding a financial advisor to your team, if you don’t already have one. A financial advisor can advise you on how your emotions can lead to bad investment decisions or how a consistent plan will almost always beat a get rich quick scheme and can also protect you against various fraudulent investment schemes.

Building an overall investment plan with the help of your team doesn’t mean you don’t need to gain the required knowledge to make educated financial decisions for yourself and be able to conduct some basic due diligence research on every investment you’re considering.

Understanding the concept of risk is crucial for investing. Basically each type of investment comes with a different level of risk and reward, the greater the risk you take of losing your money, the higher the potential return, and ideally, you want to earn the highest return with the least amount of risk.

The key to managing risk, which can’t be totally eliminated, is diversifying your investments with the help of your financial advisor by spreading your money into several different types of investments that are unlikely to all move in the same direction, so when the value of one goes down, one of the others might go up, so you either have better returns or reduce your overall losses.

And no matter how “safe” you believe an investment is, you always need to have an exit plan, in case the investment doesn’t perform as expected. Knowing the liquidity level of your assets beforehand will help you determine how your exit plan works.

Investing makes sense and it’s all about putting your money to work for you, instead of you working for money. The sooner you start investing in life, the sooner you will be able to taste the fruits of your investments. But in order for any investment plan to be successful, it needs to be aligned with your lifestyle goals and to match your risk tolerance.

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