Poor Neighborhoods Make the Best Investments

February 5, 2017

Charles Marohn of Strong Towns breaks down why poor neighborhoods are profitable while the affluent neighborhoods are not, and makes the case as to why investing in the poor neighborhoods realizes the most bang for the buck for cities.

This is not a social justice argument. I'm not writing this post to shame you into taking some altruistic action for the greater good. What I'm going to present here is pure dollars and cents.

Consider the two following investment options for your personal portfolio:

Option A: Invest in a handful of very large entities. Each comes with a lot of hype yet has a track record of under performing, even dramatically losing money. A look at peer entities shows a consistent track record of failure and decline over time.

Option B: Investment in an expansive portfolio of hundreds to thousands of small to mid-sized entities. None of these have much hype or prestige associated with them. While collectively they have a consistent track record of success, individual entities within the portfolio may be a spectacular boom or a total failure.

A few prestige companies with a long track record of failure or a large number of small companies, each with boom or bust potential but with a general upward trajectory?

It's clear that the preferred option is B. Spreading your money out over many small different investments gives you a large hedge against risk (i.e. don't put all your eggs in one basket). While each small investment could be a bust, it could also boom; broad diversification evens out the risk. In general, the gains over time are positive, although not flashy. There is significant upside potential with little downside risk, the perfect portfolio mix for the prudent investor. And you're a prudent investor, not some Wolf of Wall Street something-for-nothing.

I wrote about Lafayette, Louisiana, a perfectly normal American city that shares the basic development pattern most of you have in the places you live. I included a map that shows parts of the city that were profitable -- where the city collects more revenue than is spends -- and parts of the city that were being operated at a loss, where the long term expenditures are greater than the revenue stream.

I've (rather crudely -- I'm not a graphics pro) updated that map to show the parts of town generally full of residences occupied by poor people and parts of town with residences occupied by those that are more affluent. I used the terms "poor" and "affluent" rather loosely. There is no study that breaks this down and we don't have underlying data. That being said, when we were looking for an AirBnB to stay in, we were told to stay away from the neighborhoods marked as "poor" as they are dangerous. When we spoke to law enforcement as part of our study, we received similar insights. A look at Zillow, backed up with an eye test, also suggests that the areas marked poor are indeed occupied by people that are, on average, significantly poorer than those people living in the areas marked affluent.

Next: The case of Taco John's

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