Off the Field – Players Wives’ Association
August 10, 2012
Caralee Allsworth, CFP® & Lana Hock, CFP®,ChFC® & CDFA™
The Hoffman & Hock Group
A is for Athlete: In 2009 Sports Illustrated published an article
titled “How (and why) Athletes Go Broke”. The article states that 78% of former
NFL players have gone bankrupt within 2 years after retirement.
The Article Sites 4 Key Reasons:
1. The Lure of the Tangible – stocks, bonds, and other investments are
“invisible” and boring – inventions, nightclubs, car dealerships and Tshirt
companies have the advantage of the thrill of tangibility.
2. Misplaced Trust – athletes go through an extraordinary
metamorphosis of financial challenge. They most often have
attended college on a scholarship, then drafted – haven’t even
learned the basics of budgeting or keeping receipts. They make two
common mistakes – hiring the wrong people as advisers, and trusting
them far too much.
3. Family Matters – touchy subject, divorce, death, disability.
4. Great Expectations – of themselves and from others – Many people
around them expect help of money or jobs.
But a recent article (2012) from Fox Business quotes what we believe “NFL
players make the same kinds of financial mistakes regular people make” they live
beyond their means, become victim of Ponzi Schemes, and make risky
Here are a few more “Letters of Recommendation!”
B is for Budget: One reason for all those financial meltdowns is
that they spent too much money. The first step in creating a budget is to find out
where your money is going now. Spend Income, not principal. If you receive a
$1 Million dollar bonus, that is principal. If that 1 Million dollars ears $50,000,
that is income.
Q is for Quicken – financial software that can help you find out
where the money is going and help you monitor your progress in following your
C, F & P: No it is not the CERTIFIED FINANCIAL PLANNER™
certification that Caralee and I both have. It stands for Comprehensive Financial
Plan. Every great financial outcome starts with a plan. We often say that you
must “plan for what you cannot predict.”
D is for Diversification. U is for the “Umbrella Story”. I won’t read
aloud the umbrella story, but it is a simplistic example of how diversification
works. Diversification helps reduce risk and volatility. It does not necessarily
increase return. Also attached is a chart with many colored blocks on it. Each
color represents a type of asset, and they are ordered each year from the top
performing asset class to the worst performer. Look at the chart and tell me
which class you think will be the top performer next! You can’t tell, and neither
can we! That’s why we diversify.
E is for Education. Your husbands’ probably spent zero for their
education. Unless your children are very talented and/or very smart it will cost
much much more. Start planning now. A 529 college saving plan may be a way
G is for Goal. Financial goals have $$ signs and specific dates. For
example: we need an income of $10,000 a month when we are 66 years old. NFL
families have a head start with the programs the NFL has for you but it won’t be
Houses & Mortgages. The SI article I mentioned at the onset
states that over-allocation to real estate is the number 1 problem. Buying a
house (or houses) is one of the most important financial decisions people make.
The financial/credit crisis of 2008 affected all of us. We recommend the goal of
NO mortgage by retirement. $1 Million mortgage results in almost $2 Million
paid with interest + ongoing maintenance. Treat is as an asset class with no more
that 10-15% of your total net worth in real estate.
I is for Inflation. Inflation is one of the biggest risks of all. Our
dollar loses value every day.
R is for Risk. There is no such thing as no risk. If it
sounds too good to be true, it probably is. Some investments are riskier than
others. Business opportunities – restaurants, franchises etc. fall into this
category. A good rule is to invest only what you can afford to lose and invest
only a percentage of your assets.
J is for “Just Say No”. Disreputable people see athletes’ money as
very easy to get to. How to handle “new people”, people in search of handouts
or who have a great investment idea – tend to stretch the definition of friends
and family. (The lure of the intangible) “fail proof/no downside”. Just say No!
K is for Keep it Simple. The financial industry is good at coming
up with all sorts of very complex investments vehicles. If you don’t understand
it, don’t do it. Plain vanilla is usually best.
L is for Liquidity. The phrase “Cash is King” sometimes refers to
liquidity. High net worth individuals tend to own more illiquid investments.
How quickly assets can be converted to cash determines your liquidity –
unforeseen situations may come up that require it. This supports the need for a
Comprehensive Financial Plan.
N is for Noise. Investment headlines sell newspapers. Whoever
shouts the loudest (ala Jerry Cramer) makes the biggest story. We have so many
24/7 investment channels – it is important to remember that CNBC is in the
entertainment business, not the financial advisory business. We have become a
culture that looks for “defining moments” in everything that happens. Can you
think of some alarming words you’ve heard on TV about the markets? When the
stock market is in turmoil (for good or ill), investors need a strong filter to help
them make good decisions. Focus on your plan – and listen to the music
O is for Order. Is your life in order? Do you have a will? Are your
will and trust up to date? Are the beneficiaries of all the pension accounts
S is for Save. “Pay yourself first”
T is for Team. You will need more that one advisor. That team
will probably include a financial advisor, a lawyer and an accountant and possibly
V is for Volatility. Cartoon – There is nothing that does not wiggle
up and down. Even cash loses value because of inflation.
This is one of my favorites –
W is for Women/Wives. As women,
we have unique financial strengths. We are able to plan longer-term. We seek
detailed information before making an investment. We admit when we’ve made
an investment mistake. We are much more likely to consult a professional.
Women are rising to the challenge – 60% of all the wealth in the US is controlled
by women – many are in charge of the household finances. Greater financial
engagement – 9 out of 10 women will be solely responsible for their finances at
some point – life expectancy. Building financial awareness and knowledge is a
critical success factor.
We are out of time…actually couldn’t think of anything for these
Robert W. Baird & Co. Member SIPC. Diversification does not assure a profit or protect
The Umbrella Story
Allen Smith has the opportunity to purchase shares in two businesses. The
first is a suntan lotion manufacturer (Tipper’s Sun Lotion) and the second
manufactures umbrellas (Liberman’s Umbrellas). Both businesses are
greatly affected by the weather. If it’s rainy, Liberman’s Umbrellas will
have a return of 25%, and Tipper’s Sun Lotion will lose 10%. If it’s sunny,
Liberman’s Umbrellas will lose 10% and Tipper’s Sun Lotion will have a
return of 25%.
Allen Smith expects half of the year to be rainy and the other half to be
sunny (obviously, he doesn’t live in Phoenix). If Allen buys Liberman’s
Umbrellas, he will have a return of 25% half the year and lose 10% for the
other half. On average, Allen will earn a return of 7.5%. If Mr. Smith buys
Tipper’s Sun Lotion he will also get an average return of 7.5 %, but the
timing of gains and losses will be reversed.
If Allen only buys shares in one of these businesses, and he proves to be a
poor weather psychic he is taking a risk. However, if he buys equal amounts
in both companies, come rain or come shine he will earn 25% on half of his
investment and lose 10% on the other half. Therefore, he eliminates the risk
and still has a net return of 7.5%.
DISCLAIMER: This is a hypothetical story intended to illustrate the value of
Why Diversify? Because Winners Rotate.
Annual returns of key asset classes 1991 through 2011
Allocating your investments among diverse asset classes can help insulate your portfolio against
market fluctuations and underperformance in any single class.
Large Cap Core represented by S&P 500 Index; includes a representative sample of 500 leading companies in leading
industries of the U.S. economy. Large Cap Growth represented by Russell 1000® Growth Index; measures the
performance of those Russell 1000® companies with higher price to-book ratios and higher forecasted growth values.
Large Cap Value represented by Russell 1000® Value Index; measures the performance of those Russell 1000®
companies with lower price-to-book ratios and lower forecasted growth values. Mid Cap represented by Russell Midcap®
Index; measures the performance of the 800 smallest companies of the Russell 1000® Index, which represent
approximately 25% of the total market capitalization of the Russell 1000® Index. Small Cap Core represented by Russell
2000® Index; measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represent
approximately 8% of the total market capitalization of the Russell 3000® Index. Small Cap Growth represented by Russell
2000® Growth Index; measures the performance of those Russell 2000® companies with higher price-to-book ratios and
higher forecasted growth values. Small Cap Value represented by Russell 2000® Value Index; measures the performance
of those Russell 2000® companies with lower price-to-book ratios and lower forecasted growth values. Fixed Income
represented by Barclays Capital Aggregate Bond Index, which is comprised of approximately 6,000 publicly traded bonds,
including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an average maturity of approximately 10
years. Int’l is represented by The MSCI EAFE Index, which is an international index measuring market performance of 21
countries in Europe, Australasia, and the Far East. Indices are unmanaged and are used to measure and report performance
of various sectors of the market. Past performance is no guarantee of future results and diversification does not ensure
against loss. Direct investment in indices is not available. Equal Weight portfolio calculated by investing evenly (11.11%)
across all asset classes. The Russell Indices are a trademark of the Frank Russell Company. Russell® is a trademark of the
Frank Russell Company.