In April 1985, the seniors in my high-school French program returned from three weeks in France: a week in Paris and two in a La Rochelle lycée. They shared a photo of the class in front of the Eiffel Tower. They detailed differences between high school in France and America. And they rhapsodized about the mighty U.S. dollar.
“France is dirt-cheap,” one said. She reached into her backpack, and extracted a Sony Walkman. “This cost $30 less than it does here.”
I sat up in my chair. In two years, I would 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 or see the Mona Lisa.
The Plaza Accord
In March 1987, when our plane touched down in Paris, I pulled a few 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 arrival in France, finance ministers from France, Japan, the United Kingdom, the United States, 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 March 1985, a U.S. dollar bought 10 French francs. Two years later, it bought 6, a 40% decline in the purchasing power of my U.S. bills.
In Paris, my class visited Galleries Lafayette, an art deco temple of commerce on Boulevard Haussmann. I found the Sony Walkman, picked up display model headphones, and 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.
The Plaza Accord and my portfolio
Since 1992, when I enrolled in my first retirement plan, the post-Plaza Accord collapse of the dollar has shaped my approach to investing. I invest about 30% of my savings in non-U.S. companies and currencies, a hedge against the dollar’s decline. Academic research makes a strong case for international diversification.
In the late 1990s, however, I worked for Jack Bogle—the Vanguard founder and proudly provincial skeptic of international investing. “The reality is that we do better than the rest of the world. You don’t need currency risk, but if you want, don’t go over 20% in international,” Mr. Bogle told Investment News in 2017.
“What are you buying in non-US-stocks?” said Mr. Bogle. “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.”
Notes: U.S. stocks represented by the S&P 500 Index; non-U.S. stocks represented by the MSCI EAFE Index.
Since I started investing, $1 in U.S. stocks has grown to $20.91, as shown in the chart; $1 in the developed markets of Europe and Asia has grown to $5.35; and a mix of 70% U.S. stocks and 30% non-U.S. stocks (roughly my allocation) has turned $1 into $14.50.
I’ve laughed at Mr. Bogle’s Yankee chauvinism, but never acted on it. Markets move in unpredictable cycles. Maybe the next 30 years will be different from the past 30. Maybe not. But diversification means you always have some exposure to the best and worst performers. And 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.
–A. Clarke