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Community capital

Investing has become synonymous with Wall Street. It's all about stocks, bonds, international equities, sovereign debts, blue chip corporate bonds, and similar investments. Will Europe's sovereign debt crisis send the stock market reeling? Are America's giant multinationals a safe haven with their enormous cash cushions? How much should I have in stocks and how much in bonds?

Yet saving and investing is much more than the stock market and the health of 401(k)s. Among the most intriguing investing movements is the embrace of local communities. Think local money and local entrepreneurs. Amy Cortese, our guest writer, knows the grassroots economy well.

She's a journalist and author of Locavesting: The Revolution in Local Investing and How to Profit From It.

Amy Cortese: It's not fun being an investor these days. The options are pretty stark: parking your savings in an inflation-lagging money market fund or T-bill (or under the mattress), or rolling the dice in a stock market that has careened wildly amid global uncertainty.

But a growing number of investors are discovering alternatives in the small businesses in their own backyards. Just as locavores eat a diet sourced close to home, these investors--call them locavestors--are investing that way. The idea is to earn profits while supporting your community.

Studies have shown that a dollar spent at a locally owned enterprise generates, on average, three times more economic benefit to the community--measured in jobs, income and tax revenue-- than the same dollar spent at a corporate peer. That's because more money circulates in the local economy, rather than being sucked out to a far-off headquarters. And, as we all know, small businesses create two out of every three jobs.

That's the community part, but what about profit? Small businesses, especially young ones, hold much greater growth potential than large companies. It's true that small firms can be risky, but there is a very good case to be made for local investing as a way to diversify a portfolio and buffer it from global shocks and volatility. Companies with a localized business model are less affected by rising oil prices, for example, or an earthquake in Japan.

And, as financial savants such as Peter Lynch and Warren Buffet have long advised, it makes sense to invest in what you know. There is an information flow and familiarity that makes local companies a less risky gambit than, say, a distant conglomerate that is involved in a complex business. Indeed, size is no guarantee of safety, if it ever was--just ask the shareholders of AIG, Lehman Brothers, Enron and other former Wall Street darlings.

Don't expect to hear that from your broker, though. Local investing is, for now, a grassroots movement, flourishing in the cracks of the financial system. And until mainstream local investment vehicles are developed and decades-old securities regulations are brought into the modern age, it takes some extra effort.

But communities across the country are finding the rewards are worth the effort.

Investment clubs and networks with a hyper-local focus are springing up all over. In Port Townsend, Washington, members of the Local Investing Opportunities Network, or LION, have invested more than $500,000 in businesses including a creamery, a cidery, a bike shop and a real estate development since it was founded in 2008.

In Austin, Texas, 200 beer-loving members of the Black Star Co-op Pub & Brewery invested an average of $3,000 a piece to raise the $600,000 needed to build the brewpub. Blackstar expects to begin paying a 6 percent annual dividend this year, after just one year of operation.

And in Ohio, the Columbus-based Economic and Community Development Institute is launching the Invest Local Ohio fund, which will allow residents to put money into a fund that lends to Ohio small businesses and pays a modest return.

These are just a few examples of the extraordinary experiment in citizen finance taking place across the nation. In addition, investors and entrepreneurs are exploring crowdfunding (raising small sums from many investors over the Internet), community ownership, direct public offerings (inexpensive do-it-yourself IPOs) and even local stock exchanges, like the ones that used to serve regions as varied as Wheeling, West Virginia and Bolder, Colorado.

These local investment models have their pros and cons, but at their best, they help re-establish the links between investors and businesses and create a more inclusive form of capitalism. And that rewards all of us.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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