How to Invest Locally: Suggestions from Michael Shuman

Everyone wants to live in a thriving, vibrant community, yet we usually spend and invest our money in ways that direct that money elsewhere. While we’re often encouraged to embrace our role as consumers to buy local, much less emphasis is placed on our potential as investors in our local economy. That’s why I was so excited when local investing champion Michael Shuman published his latest book Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAS and Solo 401(k)s. This book provides much needed information that outlines how to invest locally.

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What Is Local Investing and Why Does it Matter?

Local investing generally refers to investing in locally owned small businesses with the goal of creating a more dynamic local economy. In this book Shuman broadens the investment options to include some additional strategies as well that we’ll cover in the next section.

Most Americans still invest by default in the stocks and bonds of large corporations that are headquartered far from where they live. Those investments benefit people and places outside our communities. Plus, those corporations are less concerned about what happens in our communities than local businesses are.

And these local enterprises need us to start steering our investing dollars their way since as Amy Cortese points out in this article on her website Locavesting big banks approve only 2 out of 10 small business loan requests. The statistics are even worse in the equity space where “less than 1% of all businesses receive venture capital funding—and most of that is invested in just three states.”

How to Invest Locally – 4 Strategies from Put Your Money Where Your Life Is

1. Invest in yourself, friends, family, or neighbors

As part of this approach, Shuman advocates for the financial benefits of buying a home, paying off the mortgage, and investing in repairs and retrofits that will make the home more energy-efficient and reduce household bills. I know opinions and preferences vary on this topic, but my personal experience affirms his statement that “Investing in your own home effectively means running your own hedge fund.”

Other possibilities include paying off your credit card or student loan debt. Or lending money to a conscientious friend or family member at a lower interest rate so they can pay down their debt. As I write this, according to creditcards.com, the average credit card debt in the U.S.A. is 16.05%. It’s no wonder most financial advisors will encourage people to pay down credit card debt before they begin investing in other things.

2. Invest in other enterprises

When you hear the phrase “local investing” you probably think of putting your money in conventional local businesses or real estate. Both of these are good options, but there are a number of other possibilities as well that fewer people think about. For example, local non-profits or even places of worship sometimes need to raise funds for major projects and raise money from individual investors. Your local coop grocery store may turn to its members to raise funds for a loan to make improvements to their building. In some places, it is possible to invest in local government projects that improve your community through a municipal bond offering.

3. Deposit funds at a local bank, thrift, or credit union

The BankLocal website points out that these types of financial institutions are often locally controlled and operated. This means that lending decisions are made by people who reside within the community they serve and understand the needs of local families, businesses, and farmers. Check out this BankLocal directory to find a local banking option near you. You’ll also find more tools and resources to help you find local and more community-focused financial institutions in this blog post on Impact Banking.

4. Other Options

Shuman highlights a few other possible ways we can inject our capital into the local investing scene. One idea is to participate in a local investing club. These clubs exist in various forms around the country. If there’s no local investment club in your area consider starting one. Maybe you want to establish a Slow Money chapter and start making patient capital investments in your local foodshed. Or you might want to emulate the model developed by the Local Investing Opportunities Network (LION) in Washington state.

There may be other opportunities available specific to your city through community development corporations or microcredit funds. The more you get out and talk to others in your community the more you will learn about opportunities for local investing.

Challenges and Solutions to Local Investing

Securities Laws

Shuman notes that the main reason so few of us have invested any money in our local economies stems back to securities laws that were passed in the 1930s. These laws came about to protect people from being parted from their money by fraudsters. Unfortunately, this led to the establishment of a very complicated financial system to which only wealthy businesses and individuals could afford the fees of legal and financial counsel to participate.

Eventually, mutual funds, workplace 401ks and private individual retirement accounts appeared on the scene making investing much more accessible to everyday people. But these mutual funds don’t invest in the businesses in our communities. In fact, they’re often investing in the large corporations that are putting smaller local companies out of business. Hello, boarded-up Main Street…

Something in those 1930s securities laws prohibited businesses seeking investment capital from directly soliciting potential investors (beyond friends and family) without first hiring lawyers to prepare expensive disclosure statements. Many of the small local businesses we love just can’t afford to do that and end up not being able to more easily raise investment capital from their customers and the local community.

The good news is that the Securities & Exchange Commission (SEC) recently expanded something known as “test the waters” (TTW), which will allow small businesses to converse with a wider pool of potential investors without having to plunk down $25,000 or more for the preparation of the requisite legal documents.

Crowdfunding

Even when people want to start investing in small businesses finding out which ones are seeking investors remains a challenge. The passage of the JOBS Act in 2012 was a major step forward in allowing smaller businesses greater access to crowd-funding. According to Investopedia, it also significantly increased “the number of companies that can offer stock without going through SEC registration.” Now through crowdfunding platforms like Wefunder every day investors can seek out businesses near them raising funds and start investing in them.

How to Invest Locally Using Self Directed Retirement Accounts

To the extent that most Americans have any money to invest, it’s usually in employer-based or private individual retirement accounts that only allow them to invest in a limited range of assets, generally stocks and bonds. Self-directed retirement accounts on the other hand, which include solo 401(k)s and self-directed IRAs, are a little-known option that allow people to not only invest in a far broader menu of assets but also keep their money in a tax-advantaged account.

These are the accounts Shuman encourages us to open so we can begin unleashing the potential in the trillions of dollars in U.S. retirement accounts to earn us money in ways that not only don’t compromise our values but increase the quality of our lives and communities. I opened a self-directed IRA several years ago with Advanta IRA. I appreciate the Advanta team for their competency and high level of customer service. Another self-directed custodian option is Rocket Dollar, a Fin-tech company that is working hard to make these accounts more affordable and accessible. I have written in much more detail about self-directed retirement accounts in this post as well as this one.

My Personal Efforts to Invest Locally Using a Self Directed IRA

A little bit of my story is included as one of a number of brief case studies Michael shares throughout Put Your Money Where Your Life Is. These snippets include helpful details about actual investments people have made in their communities through self-directed retirement accounts.

Regular readers of my blog may remember that it was through my desire to invest in local sustainable food businesses that I first encountered self-directed IRAs. I did some research ahead of time, but looking back now realize I opened my self-directed IRA in 2017 rather impetuously. It’s working out well enough, but I didn’t know about Solo 401ks back then. I think those are much less complicated and cumbersome so if I were to do it over again I’d likely open a Solo 401k instead since I am now self-employed and eligible for this type of account.

Part of the reason I chose Advanta IRA as my custodian company is that they are based in my area. I was extremely pleased to discover this well-regarded company headquartered so close to me. Now my custodian fees stay in the local economy and help employ people in my community.

I’ve been engaging in conversations about local investing here in my town ever since I opened my SDIRA.There’s no local investing club in my area yet. It’s too heavy a lift for me to get a club going on my own given my lack of financial and legal experience it, but I cheerlead the topic whenever I can and continuously engage new people in conversation about this idea.

These conversations have been fruitful in connecting me with like-minded people and led to two of the three local investments I have made so far. I discussed all three of these investments in this piece (as well as a number of non-local investments) I wrote with the rather bold title of How I Am Investing to Save the Planet.

I’ve also had conversations with a few friends who needed a small loan for their business or an upcoming personal expense. In the end none of these conversations led to me lending them any money either because they didn’t move forward with their plans, tapped another funding source, or didn’t feel right to me.

Until we are able to get a local investing club or other more formalized structure in my city these conversations with friends and community leaders will continue to be my primary means of identifying potential local investments. In fact, not only did I learn about the opportunity to purchase a share of a local permaculture farm this way. I was then able to tell my dear friend and fellow Florida-based permaculturalist and blogger Jenny Nazak about this investment. I’ve mentioned the much-needed book Jenny wrote on joyful low footprint living called Deep Green in previous posts. Now Jenny is the farm’s newest investor.

A Few More Local Investing Resources

There’s so much more to explore on the topic of local investing. I’ll write another blog post in the future to delve more deeply into the rich topic and highlight more of the champions in this space beyond Michael Shuman. For now though, as a form of a teaser for an upcoming interview I’ll be publishing I’d like to shout out one of the more innovative and impactful financial advisors working in the socially responsible investing space – that would be the one and only Ms. Angela Barbash of Revalue.

Angela is a pioneer in the local investing space and her work in this realm is making a difference across the country. If you happen to live near her part of Michigan and are interested in investing in that community I strongly encourage you to contact her as she is spearheading a most impressive local investing effort in that area.

Another helpful resource for getting started with making local and other impact investments through self-directed retirement accounts is The Next Egg online forum. Michael is one of the co-conveners of this forum along with the Sustainable Economies Law Center (SELC) and LIFT Economy. I find it extremely refreshing to interact with The Next Egg facilitators and other more socially conscious investors. I’ve also learned about a number of unique investment opportunities through my participation in this forum.. It’s extremely helpful for those of us putting ourselves out there as pioneer species in the realm of socially conscious investing through self-directed retirement accounts to have access to the online learning community that has coalesced around The Next Egg forum as a resource.

I highly recommend reading Put Your Money Where Your Life Is. It is a very valuable contribution compiling a great deal of useful information on local investing and what needs to be done to help it flourish in one tome. You can also sign up for Michael’s e-newsletter on his website to follow his work and receive information on the latest developments in how to invest locally.

The Future of Local Investing

There is an increasing interest in local investing. It’s coinciding with a number of regulatory changes and the emergence of crowdfunding tools that are making it easier to build personal wealth while simultaneously growing the wealth of our communities.

These converging trends have led Michael to be optimistic about the future of local investing. In the book he predicts that “…in a decade or two, there will be many brokerages, local investment advisors, local stock exchanges, and local mutual funds.” (This is a statement that gets me very excited. Let it be so…)

All that said, major legal and policy changes at the local state, and national level still need to be enacted to help make this future vision a reality. We, as interested investors, can embrace our own power to make local investing more common-place and accessible to non-accredited (not wealthy) investors. Some of the suggestions Michael has for us on this front are to:

1. Request that your local city council create a property tax credit for local investments.
2. Recruit some friends and start a local investing club.
3. Begin learning about self directed retirement accounts and consider opening one to begin moving your money from Wall Street to Main Street while keeping your money in a tax-advantaged account.
4. Commit 1% of your life savings to local investing next year. Then continue to invest 1% more every year from then on.

And Now for My Disclaimer

I want to be clear that I am still in the early stages of the learning process of my self-directed investing outside of the extractive economy journey and I am NOT a certified financial planner – far from it. I’m simply someone who so desperately wants to keep her money out of mainstream stocks and other extractive investment vehicles that I’m willing to put the time and energy into exploring some alternatives. That means NONE of this should be construed as financial or legal advice.

There are RISKS associated with all investments, including local investments. We all need to conduct our own due diligence (and Michael includes helpful suggestions for doing this in Put Your Money Where Your Life Is). My own risk mitigation strategy is to make many smaller investments so if a few of them don’t pan out, I won’t be too drastically impacted by the resulting loss. I’ve been fortunate once already to NOT lose $1,000 from a local investment I made due to a glitch in distributing the funds from the LLC associated with my SDIRA. Another friend who invested directly from a personal bank account lost the entire $1,000 investment. Do your due diligence and do NOT invest more than you can afford to lose.

Have you invested money locally? If so, please tell us about your experience in the comments below.

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