Why Invest Locally?

By Michael H. ShumanMichael H. Shuman

If you are thinking about moving some of your investment dollars from Wall Street to Main Street but unsure whether it’s smart, let me give you four reasons why local investments deserve your attention:

1. Growth Potential.  Locally owned businesses have enormous potential to expand because they are undercapitalized.  Local businesses account for slightly more than half the U.S. economy, and yet receive almost none of Americans’ $30 trillion in long-term investments (stocks, bonds, mutual funds, pension funds, and insurance funds).  This is a huge market failure.  And a huge market opportunity.  Many of these businesses are highly competitive and profitable.  In fact, the most recent annual data available from the IRS shows that the net income of sole proprietorships, which most small businesses are, or start out as, was eleven times greater than that of corporations.The reasons for this market failure have been two-fold:  Archaic securities laws have made it very difficult for the 99% of the American public that aren’t high net worth to put money into local small businesses.  And the top 1% generally hasn’t had enough compelling information or support to justify making local investments.  All of this is now changing.

2. Multiple Returns.  Local investing generates two rates of return for you – one directly for your portfolio, and another through your community.  A growing body of evidence suggests that, compared to their nonlocal counterparts, local businesses generate two to four times the local economic development impact for every dollar spent on them.  With a portfolio that includes local businesses, your dollars will continue to circulate and increase prosperity throughout your community by creating new jobs, higher incomes, and ultimately supporting better schools and parks, police and fire departments, and safe, thriving neighborhoods.

3. Superior Access.  With local investing, you can work with inside information—and not the illegal kind.  Local banks have lower default rates than global banks, because the former actually have long-term relationships with borrowers.  Similarly, by investing locally, you can put your hard-earned money into businesses that you can get to know directly, from the inside.  Before investing a penny in a local company, you can stop in to meet with the CEO, chat with the staff, and sample the goods and services.  You can effectively be your own hands-on investment analyst.

4. New Tools.  A local investing revolution is now making it easier than ever to invest locally.  As you will learn on this site, many new tools that support local investing are now becoming more common, such as IRAs that can be invested locally, investment clubs and networks that expose investors to new local investing opportunities, and even local IPOs (called Direct Public Offerings or equity crowdfunding) that allow local businesses to sell shares to the public.The securities laws that have impeded innovation for decades are getting an upgrade.  The JOBS Act, passed in 2012 and soon to come into effect, will permit any American to invest at least $2,000 per year in many more local investments.  Meanwhile, a dozen states have passed their own bold reforms to facilitate in-state grassroots investing in local small business.  Now is a great time to take note of these new opportunities.A final word of caution:  Just because local investing opportunities are becoming more common, more accessible, more scrutable, and more rewarding, it doesn’t mean every one of them will be more profitable than Wall Street investments.  Like any smart investor, a local investor must learn how to be discerning, how to manage risk, and how to assemble a personally appropriate portfolio.That’s where the Local Investing Resource Center comes in.  The investor resources on this site will take you from beginning to end through the process of building a properly diversified portfolio that includes investments in local small businesses and nonprofits.  On behalf of our team, I invite you to explore the site, learn, and experience the benefits of investing locally yourself.

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