Athletes are the Worst Investors

(730 words)

One of the few ways available for the poor to improve their financial situation is through sports. Team sports are especially accessible to the poor because of their low cost of entry and the organizers’ need to recruit and develop talent, purely on merit. The most successful athletes can earn hundreds of thousands, even tens of millions of dollars per year. But keeping the money they make is a different skill. Many professional athletes finish their careers with little to show for it than permanent injuries.

Some of the factors working against them keeping their money include:

  • Payments in the form of big checks. These make for spectacular media coverage but are difficult to manage, especially for someone not used to handling big sums. An athlete who is given a $10 million should spend no more than $120,000 in the first year, to preserve the capital, but many spend that much on a car.
  • Feelings of invincibility. As if success on the field translates automatically to success in business and finance.
  • Short career spans. Often made unexpectedly shorter by injury.
  • Divorce often coming at the end of career. Even in our liberated times, half the money still usually goes to the spouse, who can remarry or continue their career, but the athlete has no chance to earn that sort of money again.
  • Lost relatives and forgotten friends reappear and demand jobs or charity.
  • Close friends or family who want to play financial adviser.
  • Exploitation from financial sharks, who seem to be able to dazzle athletes out of their money.
  • Wanting to live the lifestyle of the rich and famous.

In an article for Sports Illustrated, Pablo S. Torre investigated the problem. He identified most of the issues in a rather lengthy article which is well worth reading for the many crazy stories. I have drawn extensively from his article for the rest of this post.

Torre notes that:

  • 78% of NFL players were bankrupt or under financial stress within two years of retirement.
  • 60% of former NBA players were broke within five years of retirement.
  • MLB players have pretty much the same problem.

 

Business ventures

Much of the money is lost on hare brained business ventures. Angels outfielder Torii Hunter invested $70,000 in an invention to make a sofa that can be inflated into a raft in case of flood. The promoter came back to the athlete asking for an additional $500,000, but by this time Hunter had been given sensible advice and refused to give more funding. The promoter and the money was never seen again.

In fact, very few new business ideas develop into profitable businesses. Watching a few episodes of Dragon’s Den will give you an idea of how many have no chance of success for various reasons.

 

Bad advice

Having related one anecdote that reflects badly on Torii Hunter, I will say on his behalf that he uncovered a case of a financial advisor who was ripping another athlete off by charging $5,000 per month for car insurance on two cars in the Dominican Republic. Even the most dishonest brokers do not rort their clients to this extent, the will normally skim an extra two or three percent in commission instead of the usual 1%.

 

Divorce

Athletes tend to marry their high school sweetheart because they feel they can trust someone who knew them before they became rich. Indeed, such partners tend to be more faithful. However a hometown beauty doesn’t compare with the temptations on offer, even to a minor sports star.

Retirement  often causes marital breakdown as the athlete spends more time at home with little to do other than getting on the spouse’s nerves.

 

Conclusion

The financial problems I have cited are associated with American sportsmen. I don’t know whether athletes who play Association Football (soccer) suffer the same problems. I haven’t heard many cases of Australian sportsmen having the same issues. There seems to be an expectation that Australian sports clubs should look after their players. I think this is because the clubs also field teams at all levels, from youngsters to veterans and including lower grades of adults.

Not all sportsmen are doomed to an impoverished retirement. The high profile and the leadership and team skills they acquire are a definite advantage for a future career in corporate or business. However, in their personal finances, being able to find a good adviser or mentor is a critical factor.

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