Community Investing 101

By Amy Fontinelle AAA

Do you want your investment decisions to have a positive impact? Do you find it difficult to concern yourself with what's happening in distant countries when you see plenty of problems that need solving in your own neighborhood? If so, community investing might be the solution. In this article, we'll explain how this type of socially responsible investing works and how to make it work for you.

SEE: Change The World One Investment At A Time

What Is Community Investing?
Community investing (CI) is a subcategory of socially responsible investing, and it aims to earn returns for investors while contributing to noble causes. Specifically, CI puts investment dollars to work locally to provide safe and affordable housing, job opportunities, education, healthcare, financial counseling, child care and other essential community services. It allows you to direct your investment dollars toward a specific community, often your own. CI also facilitates investment in underserved communities more broadly if there isn't a specific community you want to focus on.

Institutions that provide community investing opportunities help individuals and businesses who otherwise couldn't obtain financing, and in the long term allow people to help themselves. According to the Forum for Sustainable and Responsible Investment, community investing is one of the many fast-growing areas of socially responsible investing.

How to Invest
Since community investing encompasses a broad range of activities, there are many options for pursuing a community investment strategy.

For starters, instead of choosing one of the usual options for your checking and savings accounts, you could keep your money at a community development bank that lends to individuals and businesses that otherwise couldn't get a loan. Like traditional banks, community development banks are FDIC insured, but unlike traditional banks, they focus on serving a low- to moderate-income clientele. You can find banks that the U.S. Treasury Department has certified as dedicating 60% or more of their services to low-income communities at the Community Development Financial Institution website.

Investing in agency bonds is another form of community investing. Agency bonds are issued by government agencies like Ginnie Mae and by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These entities help provide housing to people who otherwise couldn't afford it.

GSE bonds, which help fund Fannie Mae and Freddie Mac, are not government bonds, so they are not backed by the full faith and credit of the U.S. government like Treasury bonds are. These GSEs are shareholder-owned corporations, and you should research their bonds and evaluate their credit risk as you would other corporate bonds. Agency and GSE bonds have inflation risk, like all bonds, and some have call risk. However, they have relatively low credit risk. You'll earn slightly better returns with these bonds than with Treasuries because of the additional risk, but unlike Treasuries, the interest is not tax deductible.

Ginnie Mae is a government agency, and investments in the agency's securities do carry the government guarantee and theoretically don't have any default risk. If you want to invest in Ginnie Mae, you won't be investing in bonds, however; you'll actually be investing in mortgage-backed securities, which in light of the 2008 financial crisis should be approached with caution.

SEE: Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

To invest in these entities, you can purchase their securities through a brokerage. You'll need $10,000 to $25,000 to start investing in agency bonds.

Other options for community investing include the following:

  • Buy real estate in poor communities to provide affordable housing for low-income tenants and to revitalize neglected neighborhoods.
  • Invest directly in community development loan funds or pools.
  • Invest in socially responsible mutual funds with a community investment focus.
  • Invest directly in municipal bonds in underserved communities to help fund infrastructure, educational facilities, and public goods and services.
  • Buy stock in publicly traded companies that invest in underserved communities. This strategy is a less direct form of community investing, but it provides an option for investors seeking higher returns than those available from fixed-income community investments.

Rewards
Community investing can be very rewarding if everything goes according to plan. You'll create wealth for yourself from the return on your investment, and you'll create wealth for others by improving their economic opportunities. At its best, CI is like charitable giving, but with the potential for you to get a monetary return. If your investment loses money, you may get some consolation from deducting your losses on your tax return and knowing you're not financially worse off than if you had donated the same sum.

The other reward from a successful community investment plan is personal. You get results you can see when you improve the lives of individuals in your community. You may even improve your own experience of living in the community if you're investing close to home.

Drawbacks
Community investing also has drawbacks. It can entail higher risk; you're often investing in people and businesses that traditional lenders think are too risky to lend to. Furthermore, your additional risk isn't necessarily compensated with higher returns the way it would be in traditional investments.

CI also restricts your investment options, and many community investments are in vehicles that provide low returns, like savings accounts and government bonds. To earn a high enough return to meet your long-term financial needs, you'll need to broaden your exposure beyond these low-return investments. You can meet this need by investing in the stocks of companies with a strong community focus or by expanding your parameters to include the broader universe of socially responsible investments. Many investors will find that it makes the most financial sense to pursue community investing in only a portion of their portfolios, but that doesn't mean you have to choose investments that you're morally opposed to in the remainder of your portfolio.

SEE: Ethical Investing Tutorial

Community investing is also often more time-consuming than traditional investing. Instead of just looking at risk, potential returns and fees, you also have to take a hard look at whether the investment meets your standards for serving the community.

The Bottom Line
While community investing's goal, like other types of socially responsible investing, is to earn investment returns while also doing good, this isn't to say that traditional investment methods don't also do good. In fact, there's plenty of overlap between the two categories. However, if you want to pursue community investing intentionally, take a hard look at your investment options before you dive in to make sure your money will serve your desired purpose.

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