Money Smart Athlete Blog

Athlete-Investors: Understand your Risk Appetite

By Iacovos Iacovides, APC Sports

When psychologists and sociologists study deviant behavior they tend to focus on socioeconomic backgrounds, conditioning and environmental and structural factors. Economists on the other hand, for right or wrong, have come up with a different perspective: risk-appetite. They argue that people commit crimes as rational beings weighing risk against gain. In the case of criminals, prison sentence against loot. The rational response to risk is not necessarily to avoid it at any cost but to take it into account in your decision making. Risk appetite refers to the amount of risk that an individual or organization is able and/or willing to accept in pursuit of certain objectives. There are three basic categories of risk appetite: risk-averse, risk-neutral and risk-seeking. Every single individual has their own risk appetite, including athletes.

Life is full of gambles. Nothing can be taken for granted and every single move including investments has a degree of risk embedded in it. When examining your investment options, you first need to understand your risk appetite to narrow your focus and consequently maximize efficiency and effect.

A risk-averse investor is one who prefers to preserve what she has instead of gaining big. Such individuals tend to go for low-risk options and therefore more stability. A low-risk investment pretty much guarantees a reasonable – albeit modest – return with a meager chance that any of the initial capital will be lost. These investors tend to place their bet on the safe side; options that have a more or less guaranteed outcome. For example, betting in industry tycoons such as Facebook, Alphabet [Google], Walt Disney, Starbucks and Apple.

As opposed to risk-averse investors, risk-seekers – a rather self-explanatory term – opt for gain over preservation of capital. They are simply more interested in making a generous profit despite the increased risk that such options tend to come with. That does not in turn imply that they do not understand risk. Quite the opposite. Put simply, they are willing to face a higher risk, if it comes with the promise of higher gain. For example, these investors might invest in start-ups which run the very obvious risk of not making it, but if they do, the profit is usually impressive. These people might have been among the first to invest in companies like Revolut.

Finally, we have the risk-neutral investors. This category is not in any way placed in the middle of the previous two; it is not the best of both worlds. Risk-neutral investors are those who do not understand risk, or at the very least, do not take it into account when making decisions. If the individual considers only gain without accounting for the inevitable accompanying risk, then they are risk-neutral. They might be described as less rational than others. Simply put, if a risk-neutral investor is presented with two options: both with $100,000 capital requirement but with option A offering $1,000 in return with 5% risk while option B offering $5,000 in return with a 40% risk, the individual will choose B because the risk does not matter to them.

Irrespective of your type, you are not necessarily either doomed or set to succeed. Professional athletes tend to have more funds at their disposal compared to the average person, although with a smaller window of opportunity to capitalize on those funds due to the short length of their careers. As athletes, you first need a basic level of financial literacy, but also an investment advisor to keep you at bay and rein you in when you are about to jeopardize your wealth and harm your financial well-being. Even risky options can turn out for the best and enrich you substantially but it is a matter of how much you can afford to “sacrifice” vis-à-vis the risk. If you are a millionaire and you choose to invest $10,000 on a risky option then you will probably be fine. On the other hand, if you place half your savings in a risky investment then it will harm your financial strength if it goes south.

An advisor will help you with all that, by presenting you with appropriate options specifically tailored for you (how you choose your advisor matters as well but this was the subject of a different article). All in all, you need to make sure you understand your risk appetite which can help you appreciate your weaknesses and assist you in restraining yourself.

For more information about the concept of risk appetite in relation to athlete-investors please contact us at [email protected].