5 Smart Ways Athletes Should Invest Their Money

While an influential component of life, proactive financial planning is significantly under-prioritized. As a result, many of us become reactive money managers, forced to reconcile our losses due to our inability to responsibly manage our assets.

For professional athletes, who often enter the radically exorbitant world of stardom at a very young age, actively investing and saving money can be a real challenge. This is especially true when you always have the spotlight shining in your face, pressuring you into making rash decisions.

Though pro athletes can earn far more than the average American’s lifetime salary in just a few years, it is not uncommon for them to go bankrupt just a few years after a young retirement. Therefore, it is critical that athletes find future proof ways to save sustainably. Here are 5 smart ways athletes should invest their money if they want to avoid going broke.

1. Diversification.

One of the most naive mistakes you can make as an investor is putting all of your eggs in one basket. This puts your investment at significant risk, given that you are only betting on the success of one stock. To counter-weight this chance, you can diversify your portfolio by investing in a number of different types of assets. You want to ensure that these stocks (or asset classes broadly) are, ideally, inversely correlated as to mitigate risk. You will not be compensated for the movement of just one stock, but rather the market as a whole.

There are a number of alternative assets, like cryptocurrencies and futures, that can be traded on as well to help you diversify your holdings. There are many ways to buy Litecoin, Bitcoin, and other types of cryptocurrencies – but it is important to do your research before making any type of significant investment. Distributing your risk among a number of different investment vehicles is a great way to diminish the volatility of any one particular stock.

2. Index funds.

An index fund is a type of “mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.” – Investopedia. For athletes, this provides a great, risk-adjusted asset class that is easily accessible and great for long term planning.

Unlike individual stocks, index funds are far less volatile and tend to ebb and flow along with the economy generally that can be far more predictable. This is another example of how you can diversify-out the risk from your portfolio.

3. Real estate.

Investing in residential and commercial real estate properties is a great way for athletes to allocate capital and receive long term gains. Real estate is a versatile asset class that can either be used to generate revenue over (rentals) or be used as a primary or secondary home. The great part about real estate, versus other types of holdings, is that, over the long scale, it holds its value.

One caution, however, with purchasing and investing in real estate is that it can be easy to over index on the need to hold multiple residential properties. Athletes, very often, fall into the trap of holding one too many vacation homes and end up falling into foreclosure. You can avoid this naive mistake by sitting down to analyze what you really need versus what you want. Cutting out these wants, especially when you still have the financial flexibility to do so, will save you years of troubles dealing with the repercussions of bankruptcy and mismanagement.

4. “Tax-saving” assets.

The loopholes of the tax system provide opportunity for tax-relief, if you are able to play with them correctly. You should consult with your financial advisor to broadly examine your current holdings and identify where and how you could move things around to reduce your amount of taxable income. Sometimes spending and investing in certain types of assets will actually help you save money on the backend.

5. Savings account.

Savings accounts that you can easily open at your local bank are the “boring, but safe” form of investing. While you will only earn a low rate for any funds you hold onto in your account, you can be sure that your money will not be going anywhere. Unlike a conventional checking account, these funds cannot be withdrawn easily. You have to wait at least a few days to get your money, as the accounts are not designed for tons of movement.

This protects you from quickly draining all of your savings and is about as safe of an investment you can make if you simply want to hold onto the cash that you have. Of course, do not expect any sort of significant returns from this holding, as there is very little risk that you will be compensated for taking.