More than half of former NBA players are broke within five years of retirement, according to a Sports Illustrated estimate. Photo: Eric Wong
After much thought and deliberation, I’ve developed a theory on why such a staggering amount of NFL and NBA players go broke shortly after retiring.
The main culprit will always be that they failed to live within their means. Supporting dozens of family members and buying multiple luxury cars has never helped anyone’s financial situation.
But, after examining my own financial struggles during and after my professional basketball career, I have another theory as to why ex-athletes are going broke left and right: The confidence needed to become a pro athlete makes you feel invincible in the investing world. The results of this hubris are disastrous.
First, some background. I played for three seasons in Israel’s professional basketball league. I was earning a decent salary, but we’re talking schoolteacher decent (around $35,000 plus bonuses), not NBA player decent (minimum salary $507,000). Still, my situation was not all that different from your typical NBA rookie.
Like most young people, I left college with minimal financial knowledge. I had never owned a credit card and I had never opened a bank account without my mom or dad holding my hand.
Plus, I went to a college where everyone ate cafeteria food for four years. I didn’t even know how to cook an egg.
Making matters worse was the fact that my college studies left me woefully unprepared for the real world. Instead of learning useful information on personal finance, I took courses in which I was literally graded on how well I could read Sarati. Never heard of Sarati? That’s probably because it’s an Elvish language JRR Tolkien made up for the “Lord of the Rings.” I’m not kidding.
To say my education was impractical would be an understatement.
Upon graduating, I shipped off to a new city and earned my first real paycheck, with very little in the way of real-world money skills. This is a situation familiar to most pro athletes. They are on their own with a pocketful of money and very few responsibilities.
That’s where many people can have a very dangerous thought: “I’m really good at what I do. I mean, I’m good at pretty much everything. I’ve got all this money sitting around. I should just make more of it.”
In almost all their cases, “make more of it” does not mean “invest in low-cost index funds.” It means thinking you’re smart enough to start a new businesses without doing the research or, in my case, to beat the stock market.
Even though investing in the market was a mysterious netherworld, I figured I’d be able to make money. After all, how hard could it be? I understood there’d be a learning curve, but I also felt like I was special. I was better. I knew how to outwork and outcompete everyone around me.
That’s the psychology of being a pro athlete, and it’s dangerous. Knowing how to shoot a three-pointer does not help you understand the risks involved with investing. Whether it’s putting a little bit of money in the market or pouring $300,000 into a Hard Rock Cafe knock-off like Rocket Ismail did, the point is the same: Being good at sports does not make you good at everything.
As obvious of a sentiment as that is to most people, it’s hard for professional athletes to grasp.
In order to get to the level these guys are at, you have to have a certain mindset your whole life. You have to believe that you are the best player on the court at all times. You have to believe as a high schooler you will be one of the 3.4% of people who will play in college, and then once in college you have to have no doubt you’ll be one of the 1.2% drafted into the NBA (it’s a higher percentage that go overseas like I did, but it’s still incredibly difficult to sign a pro contract).
Once you get to the top of the ziggurat, you feel invincible. In my case, that meant investing in individual stocks with the confidence of Carl Icahn. It was going to be a breeze.
And it was, for a while. I happened to start investing right around the bottom of the market in 2009. By 2011, I was riding high. It was almost too easy. Why wasn’t everyone invested in Apple? They were printing money. I was going to be so rich.
Then, the market tumbled. I was faced with my first real adversity. I envisioned this happening when I started out. I knew the market had ups and downs. I figured I’d just find all the smart investments and make money while everyone else was losing. I’d made clutch free throws with one second on the clock and thousands of fans screaming at me. You think I was about to be scared by a dip in the market?
Oh my goodness, I was so scared. I abandoned all my plans. I had no tricks up my sleeve. I ditched every single one of my stocks. I couldn’t handle logging into my account and seeing my net worth plummet like a stone. I couldn’t sleep until I knew my cash was safe in my bank. Or better yet, under my mattress. Yes, no one can reach it there.
It was an all hands on deck, DEFCON 1, retreat with a capital “R”.
Due to this behavior, I lost a lot of money. The market rebounded and I didn’t participate in any of the upside. Had I not panicked, I would have been fine. But, my deadly combo of overconfidence and inexperience got the best of me.
I finally had to accept the fact that there were millions of people who knew the market better than I did. These people were happy to take my money. It was tough, but I put aside my ego and decided that I wasn’t going to be able to beat the market. I now invest in index funds and I don’t check my account very often. If I had done the same in 2009, or better yet if I’d used a low-cost, incredibly easy-to-use online financial advisor such as Betterment, I would be much wealthier today.
This lesson applies not just to pro athletes, but to anyone out there who is great at what they do. Use your talents to make money, but don’t venture too far outside your area of expertise with reckless confidence.
As for me, until the time when fluency in Sarati and the ability to dribble two basketballs with my eyes closed gives me an edge in the markets, I’ll happily let the real pros help me out.
The post Being a Pro Athlete Made Me a Terrible Investor appeared first on The Simple Dollar.
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