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Most Portfolios Aren't Invested in Main Street – Here's How to Invest Local
By Justin Kuepper
Oct 25, 2022
Oct 25, 2022
Most investment portfolios are weighted by market capitalization, meaning investors typically own more large companies than small ones. For example, Apple Inc. (AAPL) makes up about 7% of the S&P 500 index, while the top five companies represent about 20% of the overall index. And one-in-three portfolio dollars goes into the largest tech companies.
While most financial advisors recommend investing in broad market indexes like the S&P 500, there are a couple of drawbacks to keep in mind. First, the S&P 500 index may offer less diversification than the name suggests. And second, investors are making minimal impact sending dollars toward massive companies that don't need them.
Why Invest in Main Street?
Small businesses inherently have a higher cost of capital than larger companies. After all, they may have a limited operational track record and less cash in the bank than Apple or Microsoft. And the higher risk of default means they typically pay higher interest rates on debt or offer more generous equity terms to lenders and investors.
For investors, the higher cost of capital opens the door to higher returns than they might find elsewhere in the market. While there's a greater risk of default for any given business, a portfolio of many small companies helps diversify and mitigate these risks. As a result, investors could benefit from superior risk-adjusted returns versus conventional stocks.
Investing in small businesses also helps improve Main Street. As more investors compete with bank loans, they will improve access to capital and drive down interest rates. In addition, individual investors can support female and minority-owned businesses that are less likely to have their small business loans approved by big banks on Wall Street.
The result is a win-win for investors and small businesses: Investors can achieve higher risk-adjusted returns and small businesses can lower their cost of capital and invest more in their business and employees. These investments are also an excellent way for investors to add impact to their portfolios without sacrificing their returns.
How to Invest in Small Business
Private investments have been off-limits to small retail investors for years. But in 2012, the JOBS Act paved the way for Regulation A and crowdfunding. These rules enable anyone to invest at least $2,200 per year into private investments, including small businesses. And these limits can be even higher depending on income and liquid assets.
Mainvest is one of the most popular crowdfunding platforms supporting small businesses. On the platform, investors can browse hundreds of small companies raising capital on various terms. And they can invest as little as $100 into opportunities that target 10 to 25% returns through debt payments or revenue-sharing agreements.
Another great platform for supporting small businesses is SMBX. Like Mainvest, investors can choose between hundreds of small businesses and invest via Small Business Bonds (TM). After investing as little as $10, investors receive monthly interest and principal payments with interest rates of 7.5% to upwards of 10% annually.
These returns are significantly higher than the 7% long-term stock market average. While they involve greater risk, Mainvest and SMBX conduct due diligence, and investors typically have some recourse. And with a diversified portfolio, they can mitigate the risk of any individual company being unable to repay their loan or generate revenue.
The Bottom Line
Most investors set-and-forget their portfolios, investing in the world's largest companies. While there's nothing wrong with that, they may also want to consider diversifying their portfolio into local small businesses and potentially generate above-average risk-adjusted returns. It's a win-win scenario for both investors and small businesses on Main Street.
If you're interested in other ways to make a positive impact without sacrificing returns, browse our database of impact investments and read out Impact Investing Guide to come up with a plan right for you.