How to Support Communities With Your Fixed-Income Investing
Investing in U.S. Treasury securities has long been the financial equivalent of vanilla ice cream: Not the most exciting choice, but generally predictable and dependable.
That reputation has made Treasuries a cornerstone of countless investment portfolios and an important source of funding for a national debt that now exceeds $40 trillion.
About U.S. Treasury securities
What is a U.S. Treasury security? It is a loan you make to the U.S. government, with terms ranging from ultra-short (four weeks) to long-term (30 years). In return, the U.S. government promises to pay back the full amount of your principal, plus interest, at regular intervals.
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Treasury securities have long been considered one of the safest investments because they’re backed by the full faith and credit of the U.S. government.
But in recent years, some investors have questioned whether an investment in U.S. Treasury securities should continue to be categorized as the default “safe” investment.
What if, for example, the trust that worldwide investors have placed in these instruments breaks, and payments are either denied or deferred? What if a significant number of investors decide they no longer want to help fund the U.S. government, because a large portion of the debt is related to military spending or other policies with which they disagree?
If these concerns resonate with you, there’s good news. There are other fixed income alternatives that could help you sleep better at night — options that put your capital to work in community infrastructure and local economies with risk profiles comparable to U.S. Treasuries and with similar or higher yields.
Choosing the right fixed income alternative for you depends on your values and financial situation.
Consider investing in a CDFI
A Community Development Financial Institution (CDFI) provides capital to certified lenders in communities historically underserved by traditional financing opportunities.
CDFIs fund initiatives such as affordable housing projects, BIPOC-owned businesses, healthcare programs, rural development projects and community nonprofits.
Many CDFIs offer bonds with nonconcessionary or market-rate returns, so the investor doesn’t have to sacrifice expected financial performance to make a positive impact.
However, investors should be aware that CDFIs are less liquid than U.S. bonds — meaning they can’t be quickly converted to cash — because these investments are typically held for a set term and aren’t traded on a public marketplace.
For those who don’t need immediate access to their capital, however, this tradeoff can be well worth it.
The Opportunity Finance Network is a free tool you can use to find CDFIs based in rural, urban and Native communities across the U.S.
One of the most direct and meaningful ways to make a lasting impact with your dollars is to invest in community projects. Private organizations pool investor capital to finance projects such as affordable housing, renewable energy, community facilities, healthcare centers, small businesses and more.
These investments can be a great way to diversify your portfolio.
As with CDFIs, these investments are less liquid because they’re intended to be held until the loan reaches maturity, so they’re not ideal for investors who need immediate access to cash.
They may also carry higher risk, depending on the issuer — however, they arguably bring the highest return in terms of community impact.
If you’re interested in finding community projects seeking investments, donor collectives such as Solidaire Network or Women Donors Network, as well as community banks, can be wonderful resources for sourcing projects to invest in.
A municipal, or muni, bond is issued by a state or local government to finance infrastructure projects such as schools, roads, hospitals, water systems, transportation and parks.
In addition to providing essential services to local communities, muni bonds usually offer the highest rate of return available in the bond space, relative to the amount of investment risk.
They can also have potential federal and sometimes state tax benefits.
However, those advantages are generally reserved for investors in the highest tax brackets, making this option less suitable for some.
The Municipal Securities Rulemaking Board (MSRB) has a free tool to help investors view and compare municipal bonds.
Remember that your portfolio can be a direct reflection of your personal values
Regardless of what type of community investment vehicle you decide on, the important thing to know is that there are always options if you’re looking to diversify your portfolio away from U.S. Treasury bonds. The right solution depends on your values, your personal appetite for risk and the timeframe you have for holding the investment.
Shifting your fixed-income strategy toward one that better aligns with your personal values is a significant step toward building a complete financial plan that fully aligns with the causes, communities and values that matter to you.
You shouldn’t have to do it alone. Using a tool such as valuesadvisor.org can help you find a financial professional who cares about both the financial and ethical impact of your investments as much as you do.
