The Local Solution

Tip O’Neill said all politics is local. The corollary for financial planners and investment advisors–at least for those who are independent and independent minded–is that all planning is local. Schwab Institutional chief Debbie McWhinney is fond of pointing out that Schwab-affiliated advisors have a geographic advantage over their bigger-company competitors. Those advisors are not just located in a specific community, she argues, but are members of that community. That gives them–meaning you–an advantage over your deeper-pocketed competitors that no amount of name recognition and image advertising can overcome.

Localization may have an effect on stock performance, too, according to a study reported by Mark Hulbert in his New York Times column of September 11. Two academics–Christo Pirinsky of Texas A&M and Qinghai Wang of the University of Wisconsin at Milwaukee–researched the stock prices of companies that were headquartered in the same geographic region of the country (the report can be found at www.afajof.org/journal/forth_abstract.asp?ref=256). They found that “stock returns of companies headquartered in the same geographic area exhibit a strong degree of comovement . . . unexplained by comovement in underlying fundamentals.” The researchers conclude that “the existence of a local component in stock returns implies that geography might be an important consideration in achieving efficient diversification.”

There’s an interesting interplay between the local and the national in our country. Most Americans cherish the notion of local autonomy and resist the encroachments of the federal government. We like our independence because we believe that in most cases local people can do more good than someone from the state capital or from Washington. My home state–the fourth smallest in the Union–has more than 500 municipalities, each with its own school board. Highy inefficient, to be sure, but don’t try and take away those inefficient boards from any New Jersey town.