1) What is investment? Investment is money you put in people, projects, and businesses, with the hope that they will grow your money. If you lend money, you want the funds paid back with interest. If you buy stock, you hope it will pay dividends and appreciate by the time you sell.
2) What is local investment? When it comes to investment, most of us put money into stocks, bonds, mutual funds, and pension funds that put the money in the hands of unfamiliar businesses or schemes that may be hundreds or thousands of miles away. Local investment, in contrast, means putting money into our local businesspeople, our city’s infrastructure, our neighbors, and our kids.
3) What do you mean by term “local”? The term “local” embodies not one but three distinct concepts—proximity, ownership, and control. When people talk about “local” food, they often mean that the distance from the farm to your kitchen table is short. Proximity matters because you can get to know—and trust—all the people who touch your food along the way. Close proximity means a lower carbon footprint for a purchase, if you’re worried about climate change. It means more local self-reliance and resilience, if you’re worried about far-away threats like Mad Cow Disease or getting your oil supply cut off.
“Local” also refers to local ownership. Suppose your community has a factory manufacturing refrigerators and selling them to the world. If that factory is locally owned, it’s far less likely to move to China and take away local jobs. It’s also more likely to buy supplies locally, which increases its contribution to community well-being. We know that locally owned businesses tend to re-spend more of their money locally – on local accountants and lawyers, on local advertising, in local taxes—and these expenditures multiply through the regional economy in the form of more income, wealth, and jobs.
For a community to enjoy all the benefits of a given business, however, that business not only needs to be locally owned but also locally controlled. Think about franchises. A McDonald's restaurant might be locally owned, but technically the franchise holder can’t buy supplies locally, can’t design his/her own signage, and can’t advertise freely—behaviors that might otherwise increase the positive economic impacts for the community.
Given these considerations, a reasonable definition of a local business is one where 51% or more of the owners live in the community where the business operates. We still might quibble about the right size of a community. Is it a neighborhood? A city? A county? A metropolitan area? A region? Probably the best answer is “it depends.”
4) Is investing in myself or my family a form of local investment? Sure! In fact, for most Americans, the most significant retirement savings they will have is the equity in their home. Local investment also can mean getting yourself out of credit card debt, investing in a solar energy system on your roof, or starting your own business.
5) Why is local investment important? Basically, you get two kinds of payoff—a personal return (which you would get from any investment) and a social return by pumping up your local economy.
6) Can you explain more what you mean by a “social return” on your investment? If you have two possible investments, one a locally owned business and one not, that are identical in terms of their expected risks and returns, you should always favor the local investment. Your local investment will grow your local economy—enabling businesses to hire more local residents and generate more revenue. This produces more tax dollars for your local government, enabling it to provide better services, improving your quality of life. It’s a virtuous cycle. And even though we don’t know exactly how to quantify all these social benefits, we know they are not zero. In fact, most of us consider local amenities and characteristics, including the quality of schools, the level of crime, and the presence of parks and other green spaces, as the principal drivers for our decisions about where to live.
7) Why should I invest in local businesses? Local businesses are critical to a community’s prosperity. Several dozen studies have shown that when you compare two businesses, one locally owned and one owned by outsiders (maybe a chain store), for every dollar of sales, the local business generates two to four times the jobs, income, wealth, and taxes. Local businesses also contribute to local entrepreneurship, tourism, sustainability, resilience, and social equity.
8) Are local businesses a relatively small part of the economy? Not at all. Over 96% of all business entities in the United States are locally owned! If we look at jobs and output in the U.S. economy, the only size category with many nonlocal businesses is “businesses with more than 500 employees” and they represent—about 40% of the economy. It’s also worth pointing out that plenty of very large companies, like hospitals or universities, are locally owned as well.
The private company Dun & Bradstreet, which maintains an updated inventory of every business establishment in the country, has a slightly different definition of “local.” It calls an establishment—an office, a factory, a store—local if its headquarters is in the same state. By that definition, about 80% of the economy in the United States, again by jobs and output, is locally owned.
9) How much of our life savings is in local business? Almost none. Americans now have over $70 trillion in stocks, bonds, mutual funds, pension funds, and insurance funds—nearly all of it in global, publicly traded companies. Walmart, for example, is not locally owned or controlled anywhere, except by its shareholders who live all over the world. Even Walmart’s managers living at the home base in Bentonville, Arkansas, ultimately must answer to these far-flung shareholders.
10) Are local investments risky? Yes, all investments are risky, both local and conventional. You should always assess your own financial situation (and your ability to withstand a loss) before you invest a penny in anything. But if you approach local investment with prudence and common sense, you can earn a rate of return that matches or exceeds what you would get on the stock market, while being sure your money is supporting your community and its economy. One way in which local investment is less risky than conventional investments is you have the ability to “ground truth” them more than a Wall Street investment. You can walk into the business, pose questions to the manager, and chat with the workforce. This turns out to be the best way of evaluating companies anyway. We know this because community banks with long relationships with companies have lower default rates than global banks that rely strictly on computer-generated credit scores.
11) Are local businesses profitable? Some are, some aren’t. The most recent data from the Internal Revenue Service (IRS), from the year 2013, show that sole proprietorships, which most small businesses are or start out as, are three times more profitable than C corporations, with the profitability of partnerships falling in between. In our not wildly dissimilar neighbor to the north, Canada, recent data suggest that the most profitable companies have 10-20 employees, while the least profitable have more than 500 employees.
12) Don’t most local businesses fail? No! Most startup businesses do not last longer than five years, but more than 95% of the local businesses in your community are not startups. If you’re worried about risk, you’ll want to invest in local businesses that have been around and profited for five to ten years.
13) Is “impact investing” local investing? Not yet. “Impact investors” seek to achieve social ends with their money—no fossil fuels, no tobacco, no gunmakers. One recent estimate is that about a quarter of all investment worldwide—$20 trillion—is being done through screens factoring in environmental, social, and governance (ESG) concerns. But generally they are investing in publicly traded, global companies. There is interest among some impact investors, however, in learning about opportunities to invest locally.
14) Can local investing beat the returns on Wall Street? If we’re just talking about private returns, the answer is “sometimes.” The historic annual returns from Wall Street investments, according to data compiled by Yale Professor Robert Shiller, are currently about 8%. This calculation removes inflation, adds dividends, and avoids compounding, and should be understood with a bunch of footnotes.
First, Wall Street’s indices are at all-time highs right now. If you start counting in January 2000, which means your data include the NASDAQ collapse as well as the 2008 crash, the average annual return since has been about 5%. Second, for most investors, there’s a transaction cost of 1% or so per year associated with buying, trading, and managing the securities (if you haven’t done so, please read the fine print in your mutual fund annual reports). Third, the 8% return reflects a perfect stock portfolio, left in perfect index funds, for the perfect long-term where no timing mistakes are made. None of us, sadly, are perfect, and enter and exit at moments dictated by our beautifully imperfect lives. Finally, consider that most of us invest in the stock market by picking stocks or investing in several “expertly” assembled portfolios available through our mutual fund or retirement fund. The vast majority of these funds underperform the market in any given year; over five or ten years, nearly all of them do. If most fund managers underperform the stock market averages, so will you. A reasonable goal for a local investor is probably to achieve 5% annual return. Again, some local investments—in real estate, for example—are surpassing this already. Others may generate somewhat smaller returns.
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