In the past two decade we have experienced a rather dramatic change in the way that households invest. Fuelled by a lot of bad press on active management and the skills of banks and asset managers, many have decided to disengage from stocks market investing and switch to a standard savings account, mutual funds and index funds. Obviously, the global financial crisis of 2007/2008 had a lot to do with this too. In 2020 and 2021, the COVID19 crisis kept a lot people at home, reengaging them with stock markets. Some of them started chasing stocks such as GameStop motivated by boredom or protest against the evil of hedge funds.
Unfortunately, this leads to a disconnect between the typical citizen and the financial markets. Few people understand the true contribution of fianncial markts to society, as a means of allocating investments to valuable projects and as a means of facilitating cooperation between people with small savings how do not know each other. Many people lost their trust in financial markets, mostly as a result of the many scandals in the previous two decades.
In this blog, I like to draw the attention to one often ignored reason: the strong focus on individual returns in combination with the anonymity of investments. It is of course difficult to deny that the main motive for investing is financial returns. However, money itself doesn’t create wellbeing, but the way it is spend may have a big impact. As an example, most of us would appreciate a carefully selected personal birthday gift over a check. This also applies to investing. Probably the only benefits of investing in the MSCI Global Large Cap Equity Index are its financial returns and perhaps the idea that you have not been ripped off by a greedy asset manager. There will be little affection in your decision to buy this index.
For this reason, it is understandable that investors increasingly choose for socially responsible investments. Yet, many socially responsible investment funds are spread across the globe, and give the investor little more than the idea of doing well without knowing what it actually means. Globalization provided the world with economic growth, but made it difficult for the individual human being to understand and belief in the system that generates wealth. It has become abstract and far away, resulting in rising populism and focusing on the home country. Donald Trump got elected on his theme ‘Make America great again’, yellow vests crowd the streets of France, the people of Great Britain opted for Brexit, and so on.
It is important that humans can effectively engage and connect with the systems that support their lives, and one of these systems is the financial system. For this reason I have a very modest proposal that may be helpful. I propose that people can choose an investment portfolio of firms that is active in the local neighbourhood, province, or city. In particular, I propose that such a portfolio would allocate its investments according to the number of people working in the region for the particular firm. Essentially, you invest in firms that employ your neighbour.
There are some practicalities here, but I did some basic checks for the provinces of Groningen, Friesland, and Drenthe in the northern part of the Netherlands, which yielded interesting results. First of all, there are more than 100 companies active in this region that are listed on the stock market. That is sufficient for creating a well diversified portfolio. There are many firms listed on a foreign exchange, and so perhaps the most surprising results is that this regionally oriented portfolio is actually an internationally diversified portfolio. In addition to this, the branches of these firms provide over 20,000 jobs, which provided an additional argument for citizins of the northern part of the Netherlands to invest in this portfolio: Invest in the job of your neighbour!
Of course, my proposal is rather broad and should be investigated further to make it operational. Yes, there are a lot subjective choices. What kind of firms do we want in Groningen? Polluting firms with a lot of employment? Should we focus on the energy transition? But having these discussion on the level of a local investment fund is a lot better than outsourcing them to fund managers in faraway financial centres!
This video shows you how to calculate optimal portfolios with constrains using Excel’s solver.