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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.