In the two charts below I have combined the Index annual returns in USD and ISK. Each diamond shows the return in USD on the horizontal axis and in ISK on the vertical axis. Thus a diamond above the horizontal line is a positive return in ISK. The blue diamond shows the most recent year (2023). Starting with total returns, we have 22 diamonds in the upper right quadrant, which refers to years with positive return in the Index, both in USD and ISK. Within that area, the diamonds above the angled orange linear regression line show years where an increase in the USDISK rate improves the Index returns in ISK.

For instance, the World Index produced a return of about 24% in USD terms in 1988. However, the 32% rise in the US dollar versus the ISK that year boosted the Index return in kronas – resulting in 61% return and the highest return in ISK seen in this 36 year period. The collapse of the Icelandic krona in 2008, resulting in a 95% appreciation of the USDISK rate that year, offsets the +40% negative return in the Index in US$ and generated a 16%+ positive return in kronas.  

We only have seven years where the return in ISK is below the horizontal line and thus negative. Four of them show a relatively “mild” negative return and one year is about -10%. Two years, 1990 and 2002, show drastic negative returns of 24% and 37%. In the latter year, the Index produced a negative 20% return in USD and the USD declined 21.7% against the ISK. Therefore, the decline in the US dollar made the performance even worse.

So currency matters, at least in the short run!

Here is the chart for the price returns. 

Earlier I showed annual total and price returns of the MSCI World Index in US dollars. Now I show the Index annual total returns in Icelandic kronas to see how movements in the exchange rate of the ISK affect the Index returns from the perspective of an Iceland-based investor.

When converted to and expressed in ISK terms, using the Central Bank of Iceland end of year reference bid rate up to April 2020 and the mid rate thereafter, we see how the exchange rate between the ISK and USD can increase or reduce the returns for an Icelandic investor. A USD appreciation vis-à-vis the ISK improves returns in kronas, while a depreciation of the US dollar vs. the krona can worsen the returns in ISK. So the move in the USDISK exchange rate can act both as a blessing or a curse for investors located in Iceland.

The first two charts below show the annual total returns in ISK for the Index over the 36 year period (1988-2023). In 27 years out of 36, the Index generated positive total returns in US dollars. If we convert the Index and express it in Icelandic krona (ISK), then we get 29 positive and seven negative return years. A relatively strong or strengthening US$ against the ISK has a positive effect on the Index return in ISK terms. Vice versa for a weak or weakening dollar. Last year (2023), the return of the Index in USD was 24.4%. However, over the same period, the USD decreased 4.1% in value versus the ISK – resulting in a 19.3% positive return for the Index in ISK. 

Third chart shows the annual total returns in context of the mean and the standard deviations. We have 19 years with above average (blue line) returns, five years where the returns are more than one standard deviation above the mean and five years where the returns are more than one standard deviation below the mean. However, we have only two years (1988 and 1989) where the positive return is above two standard deviations and one year (2002) where the negative return is below two standard deviations.

In 2023, the price return for the MSCI World Index was 21.8%, the best performance since 2019.

The two charts below show the annual price returns for the MSCI World Index in US dollars from 1988. I split the 36 years into two 18-year period charts for clarity. Bars on the right show positive returns and bars to the left show negative returns.

Over the whole period, the Index has generated positive returns in 26 years out of 36 or 72% of the time. During this period, the Index showed the best performance or highest positive return in 2003 (not surprisingly since it was recovering from the 2000-2002 bear market) and the worst performance or highest negative return in 2008. If we categorize the positive return numbers further, we can see that in six out of 26 years we get a return under 10%. Nine times the return is between 10% and 20%, ten times it is between 20% and 30% and there is one year where the positive return is 30% or more.

Strings of gains are very important. We have three strings of two-year gains (1988-1989, 2009-2010 and 2016-2017), two strings of three-year gains (2012-2014 and 2019-2021), one string of five-year gains (2003-2007) and one string of seven-year gains (1993-1999). There is only one period where we get a loss string and that is during the severe bear market from 2000 to 2002 (three years).  

The third chart shows the annual price returns in the context of the mean and the standard deviations. We have 22 years with above-average (blue line) returns and three years where the returns are more than one standard deviation above the mean. However, we have six years where the negative returns are more than one standard deviation below the mean, one of them (2008) is close to three standard deviations below the mean (outlier).

In 2023, the total return for the MSCI World Index was 24.4%, the best performance since 2019.

The two charts below show the annual total or gross returns (including reinvested dividends) for the Index in US dollars from 1988. I split the 36 years into two 18-year period charts for clarity. Bars on the right show positive returns and bars to the left show negative returns.

Over the whole period, the Index has generated positive returns in 26 years out of 36 or 72% of the time. During this period, the Index showed the best performance or highest positive return in 2003 (not surprisingly since it was recovering from the 2000-2002 bear market) and the worst performance or highest negative return in 2008. If we categorize the positive return numbers further, we can see that in four out of 26 years we get a return under 10%. Nine times the return is between 10% and 20%, eleven times it is between 20% and 30% and there are two years where the positive return is 30% or more.

Strings of gains are very important. We have three strings of two-year gains (1988-1989, 2009-2010 and 2016-2017), two strings of three-year gains (2012-2014 and 2019-2021), one string of five-year gains (2003-2007) and one string of seven-year gains (1993-1999). There is only one period where we get a loss string and that is during the severe bear market from 2000 to 2002 (three years).   

The third chart shows the annual total returns in the context of the mean and the standard deviations. We have 22 years with above-average (blue line) returns and four years where the returns are more than one standard deviation above the mean. However, we have seven years where the negative returns are more than one standard deviation below the mean, one of them (2008) is close to three standard deviations below the mean (outlier).

Never lose money is the first and second rule of investing. It is very important to keep losses in the financial markets to a minimum. Why? Because it is very difficult to regain out-sized losses. The losses are asymmetric and exponential. Let me show you the basic math. The first chart shows how much percent gain is required (left axis) to get back to square one after X amount of loss (horizontal axis). A 50% loss requires a sequential 100% gain just to break even. The columns show how much percent gain is needed for an additional 1% loss at each level. So, a 300% gain is needed to reverse a 75% loss and an additional 1% loss at that 75% level requires a 16% additional gain to take it back where it was.

Now to the interesting part. What if we calculate the inverse of the first chart. The second chart shows how much loss, after an X amount of gain, takes you back to where you started. If you have a 10% gain, a mere 9.09% takes you back to even. After a previous gain of 25%, a loss of 20% wipes it all out. The columns show how much percent loss is needed for an additional 1% gain at each level. So, a 10 percent decline can be more than a 10 percent correction and a 20 percent plunge can be a bit more than a bear market. In other words, out-sized gains can be quickly reversed.