Summary: Most of us know the benefit of eating locally grown foods – they are fresh, full of nutrients, and contribute to our overall health and wellness. So, what about nourishing our financial wellness while also fueling our local economies? Community ownership is a rewarding way to build this financial health.
Community investing can earn returns for investors while putting those dollars to work locally to support growing Main Street businesses and providing job opportunities in the process. Investing outside of Wall Street allows us to direct our investment dollars towards challenges that need solving closer to home. There is no doubt our communities would look quite different if even a small portion of our investments were made within our own neighborhoods.
When we hear the term “public markets” it means investments that are available to the general population such as stocks and bonds that trade on traditional stock exchanges. In the private markets however, fast-growing companies that are not yet publicly traded sell professional investors (such as institutions and wealthy individuals) company shares in exchange for the capital they provide. Until the JOBS Act rolled out in 2015, the majority of Americans were prohibited from this second type of opportunity - investing in companies before they are public - which is unfortunate as, historically, it is in these private markets that most of the investment returns occur. In just one example, while Uber’s valuation appreciated 2,059,900% from its initial private “seed” funding to the time it went public, it is down 36% today from its IPO. That means all the financial return happened in the hands of private investors instead of benefiting everyday retail investors. To put it into even simpler terms – a $10,000 investment into Uber’s initial investment round in 2010 would have returned over $200,000,000, whereas a $10,000 investment once the stock was available to the public would be worth $6,435 today. That stings a bit, doesn’t it?
Of course, not all private companies will have a trajectory like Uber but in general the private markets are where wealth is built.
Using private capital in collaborative ways not only can increase financial returns but helps create a more equitable and sustainable world. In addition to supporting small business ventures, this model can fund renewable energy projects and affordable housing. In Germany for instance, over 50% of renewable-energy capacity is community-owned. According to The Guardian, more than one million households and small-scale investors there have turned into energy producers. They believe peer-to-peer lending, which allows individuals to lend or raise money for projects directly, could boost community-ownership of renewable energy across the world.
Moving capital to Main Street means shifting power. When we have a stake in our communities, we are more engaged, we exercise our voices and can often reduce the influence of the bigger power brokers. We all need to understand the power of our wallets and how, by steering our capital towards private market investments, we can contribute to the funding gap for entrepreneurs, provide affordable energy, and finance important solutions like affordable housing. We need more inclusive capital markets where everyone can participate to fill the gaps left by traditional finance.
Although community investing can be more time-consuming than traditional investing, it doesn’t always have to be that way. More and more online financial platforms such as Worthy Financial are providing painless access to alternative, community focused investments. These platforms offer access across all asset classes from equity in growing companies, to local real estate, to supporting farmers or solar energy providers. You can even invest in creative assets like classic cars, artwork, and wine as another path to moving away from Wall Street while building your wealth.
The barriers that have prevented the average investor from accessing the same benefits that larger institutional or high-net-worth investors have had are also dissolving. Regulators recently opened a new path allowing retail investors to hold private investments in their professionally managed 401(k) accounts. Although it does not yet allow for direct investments, it’s a good first step - and investors can currently make their own alternative investments through a self-directed IRA.
The other benefit of private market investing is portfolio protection and diversification. Given the shock to the stock market the coronavirus has created, holding assets not tied to the public markets has never been more important. Diversification goes a lot further than owning ETF’s – investors need assets not correlated to stocks. The markets are hard to predict and often emotionally driven – the travel and retail sectors are down 20% from just a month ago when we thought the pandemic was beginning to fade. That’s a loss no one would like to see happen to their nest egg.
Community investing can be very rewarding while also working to rebuild an economy hurt by globalization. By bringing our dollars back to Main Street, we not only create wealth for ourselves from the return on our investments, but we create wealth for others by improving their economic opportunities. Citizens should more deeply share in the value we create in the economy – by doing so we will create a more robust and sustainable economic future for all.
This blog originally appeared on mint.com