This is a year for the record books.
As we stand gaping at the incredible market losses in the last three months, we search for comparisons. The period I remember most vividly is 1973-1974. Large common stocks lost 14.7 percent in 1973 and another 26.5 percent in 1974. At the time, it was the worst decline since the Great Depression.
Houses didn't sell. The second-home market died. Everyone wondered how bad it would get. But 10 years later, large common stocks had provided a return of 6.7 percent, including the years of loss.
What we're experiencing today is worse. As I write this, large common stocks have declined 39 percent over the last 12 months - more than the combined decline of 1973-1974.
So, how bad is this decline?
There is a good chance that when Dec. 31 rollls around, the 10-year loss may be the worst in the last 74 years. It will certainly be among the four worst 10-year periods. Can we find any silver linings? Absolutely.
Tax-free investment gains in mutual funds. In past periods of heavy declines and fund redemptions, mutual funds have been forced to realize capital losses that could not be distributed. As a consequence, we will see thousands of mutual funds with capital loss carry-forwards by early next year. This means you don't have to worry about buying a tax liability when you buy a fund. It also means you don't have to worry about a higher capital gains tax rate that may be coming. Many mutual fund investors won't see any taxable capital gains distributions until the next presidential election. The opportunity for tax-free returns will include bond funds as well as equity funds - at the end of September, according to Morningstar, more than 400 municipal bond funds had capital losses of at least 10 percent of their portfolios.
Zero-expense closed-end funds. Closed-end funds - funds that sell on an exchange rather than through issuing or redeeming shares directly - are now selling at serious discounts to net asset value. In other words, you can buy $1 of assets for 80, 85, or 90 cents. If you think of the 10 to 20 cents you didn't have to pay as a side fund devoted to earning enough to cover the cost of running the fund, many of these funds will have free or subsidized management.
Reduced investment expenses. There is only one direction for mutual fund and exchange-traded fund management expenses to go - down. An example: Typical retirement target-date funds have expenses around 1.2 percent a year. Low-cost firms like Fidelity and T. Rowe Price deliver at about 0.70 percent a year. But Barclay's has just disclosed a family of target-date ETFs with expenses of 0.29 to 0.31 percent.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
© Copyright 2008 Globe Newspaper Company.
