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IN APRIL 1985, SENIORS in my high-school French program returned from a week in Paris and two in a La Rochelle lycée. They shared photos of the class in front of the Eiffel Tower. They detailed differences between French and American high schools. And they rhapsodized about the mighty U.S. dollar.
“France is dirt cheap.” The speaker extracted a Sony Walkman from her backpack. “This cost $30 less than it does here.”
I sat up. In two years, I’d take the same trip. The chance to capitalize on American dollars in a metaphorical French flea market was at least as exciting as the chance to eat frogs’ legs and see the Mona Lisa.
In March 1987, when our plane touched down in Paris, I pulled grubby bills from my pocket, rubbed them between my fingers, and turned to my seatmates. “It’s party time, friends.”
But the party never started.
Between 1985 and my 1987 arrival in France, finance ministers from France, Japan, the U.K., the U.S. and what was then West Germany convened in New York City to negotiate The Plaza Accord. Their objective: reduce the value of the U.S. dollar, whose strength was producing unsustainable imbalances in global trade.
They succeeded. In 1985, a U.S. dollar bought 10 French francs. Two years later, it bought six, a 40% decline in the purchasing power of my U.S. bills.
In Paris, I visited Galeries Lafayette, an art deco temple of commerce on Boulevard Haussmann. I found the Sony Walkman, pressed play. French pop rattled around my head. I checked the price and did the exchange-rate math.
The Plaza Accord had exterminated the French flea market.
Since 1992, when I first enrolled in a retirement plan, the dollar’s post-Plaza Accord collapse has shaped my approach to asset allocation. I invest 30% of my assets in non-U.S. companies and currencies, a hedge against the dollar’s decline and a wager that great companies exist beyond U.S. borders. Research makes a strong case for international diversification.
Not everyone buys it. In the 1990s, I worked for Jack Bogle, Vanguard Group’s founder and proudly provincial skeptic of international investing. “The reality is that we do better than the rest of the world,” Bogle told InvestmentNews in 2017. “You don’t need currency risk, but if you want, don’t go over 20% in international.”
He continued: “What are you buying in non-U.S.-stocks? The largest country in EAFE [developed non-U.S. markets] is Britain; the second-highest, Japan; and the third is that soul of hard work, France. I can’t see that I’d make more money in Britain, with Brexit; or Japan, a very structured, aging economy—or France, where they couldn’t pass a law saying you had to work 35 hours a week.”
Since I started investing, $1 in U.S. stocks has grown to $20.91, as shown in the accompanying chart, while $1 in non-U.S. developed markets has grown to $5.35. A mix of 70% U.S. stocks and 30% non-U.S. stocks (roughly my allocation) has turned $1 into $14.50.
I’ve chuckled at Bogle’s Yankee chauvinism. (He had a great sense of humor.) But I’ve never acted on it. Markets move in unpredictable cycles. Maybe the next 30 years will be different from the past 30. Maybe not. Diversification means you always have exposure to the best performers and the worst.
But I like the idea of holding assets denominated in different currencies—a preference picked up in the electronics section of a French department store in 1987.
Andy Clarke is a financial writer and editor in Pennsylvania. He worked for three decades in investment communications and research. Andy is a CFA® charterholder and CFP® certificant. He blogs sporadically at TheSecondPaycheck.com.
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Typically not mentioned by international advocates: currency risk (gains/losses due to local currency vs. dollar) and higher expenses (inherit in purchasing and analyzing overseas companies). And as noted, one gets overseas exposure from US stocks….
Just this morning I moved a portion of my international index to an India ETF. People who haven’t visited these growing economies do not understand the change that is taking place.
When I started investing, I held around 15% in VWO, the Vanguard ETF for emerging markets. After underperforming for quite a while, I sold it. I now obtain my global ‘diversification’ from holding the entire US stock market with VTI. Sometimes long term trends are what they are for a reason.
This may have nothing to do with the subject of the article but here goes. About a year and a half ago I bought a condo in Greece. I’d been debating if I should do it for at least 10 years. After years of crisis, Greece had turned things around but the biggest factor was parity in the euro to the dollar. Assuming I’d bought at the beginning of the greek crisis I’d have paid less for the condo but the euro was worth 1.35. I think I came out ahead by waiting.
Nick,
You think like I do, for better or worse.
Since my pre-investing experience in France, I’ve placed (perhaps) undue emphasis on exchange rates.
When the dollar gets stronger, I revel in the opportunity to acquire non-U.S. stocks (a condo, in your case) with a currency that enhances my purchasing power even as this strengthening reduces dollar-denominated returns on my investments.
And when the dollar weakens, I worry about using an enfeebled currency to buy non-U.S. assets, even as the dollar’s decline enhances my returns.
Thanks for your insights, and congratulations on your condo purchase in Greece.
Andy
The world has changed a lot since the likes of Buffett and Bogle were so very U.S.-centered when investing; Buffett now has substantial holdings in China’s BYD and in Japan.
Since 1971, there have been six cycles of ex-US indexes outperforming US ones, and five cycles of the reverse. Right now, I wouldn’t over-index on the cumulative performance of the U.S. market as our valuations are stretched by many measures (P/E, CAPE, dividend yield, P/B, P/CF, and EY spread). I think the key take-away from Andy’s graphic is that you can still enjoy terrific gains when diversified.
There are many reasons to invest in both US and ex-US index funds as a long-term investor. Here’s one: over the next 40 years, ex-US demographics in Asia and Africa are likely to drive more new economic activity in those regions than in the EU and US, creating new consumer markets with rising per-capita income. International companies will profit from that, but so will local ones, some growing to become international engines of growth too.
I have no idea what the future holds, so I’ll remain diversified with equity holdings both here and abroad as long as I’m not pushing up daisies. I won’t diversify my bonds overseas, but that’s a different story.
Good insights, David Powell. I’ve been especially interested in Buffett’s recent investments in big Japanese conglomerates that seem to be emerging from a 30-year deep freeze.
Mr Bogle apparently modified his reasoning about international since you worked for him. At all three of the Boglehead conferences I attended he was asked the question about international. Each time he replied that virtually all publicly traded US companies are players on the international stage, therefore, specific allocations to international are likely not necessary. He went on to add that if one wants some international exposure it might be best to limit it to 20% of one’s AA.
B Carr,
I think we’re on the same page. Even in the late-1990s, when I worked for him, Mr. Bogle noted that U.S. companies derive much of their revenue from non-U.S. countries. And at the time, he (grudgingly) conceded that a 20% allocation to non-U.S. stocks was reasonable. After all, as Vanguard founder, he introduced non-U.S stock funds that are a big part of my portfolio today.
Thanks very much for the comment.
Andy
Andy, I appreciate your writing—thanks! To stick with international stocks, I keep repeating the mantra “diversification, diversification…”
Thanks, Edmund. I really enjoy the site and its writers. I learn a lot from them. Keep repeating. Our day will come . . . maybe.
I enjoyed reading your article. Diversification is always a personal and interesting dilemma. I tend not to be a over thinker. As I near my retirement at the end of this year “simplicity” rules. I choose to be 100% USA only. Over all of the years I’ve stayed with my USA only portfolio I’m so far ahead my the I would be if I had diversified worldwide even if the tables turn my gains will still be better off.
I also found myself in France (Bordeaux) in 1983-84 and enjoyed 10 francs to the dollar. I was overwhelmed by consumer choice in wine and so had to create a heuristic – oldest bottle under 10 francs. C’est la vie. Thanks for your article.
I was fortunate enough to buy all of my current international index exposure in March 2020, as the FTSE Global Index ex. US Index hit its 10-year low (just before the Fed stepped in to avert the continuing meltdown from the Covid pandemic). So my 55% total gain over the last 4 years is atypical. I’m just wondering if I’ve already received most of the expected benefit of international index “diversification” at this point.
Andy, thanks for a nice article. I struggle with the US vs. international allocation. I find it a bit ironic that a Vanguard advisor I spoke to about 5 years ago recommended an allocation to international stocks and bonds.
Thanks for the link to your website. I’ve read a few so far and enjoyed them.
Andy, thanks for the interesting article!
I like the quote “Maybe the next 30 years will be different from the past 30. Maybe not.”
I also read some of the articles on your website and will need to read more of those. They are short and filled with good information.