Q. I am concerned about mutual fund investing in the event of a market decline( when, not if). You have referred to the stock market crash of 1973-74 in your column. I do not remember this since I was young, uninvested, and uninterested. But please tell me if you had owned shares of mutual funds at the time of this crash and just held on to them, would they have come back and become a viable investment in a few years? In other words, mutual fund shares did not become worthless, did they? And would it have actually have been a good time to buy rather than panic?

---J.D., Dallas, TX

A. No, mutual fund shares did not become worthless in the OPEC market crash. It was many years, however, before investors recouped their real losses. Shares in growth and income equity funds lost much of their value, shares in the aggressive growth funds were crushed. One reason is that inflation was roaring even as stock prices were declining, compounding the loss.

The table below shows the returns, before and after inflation adjustment, for the Standard and Poors' 500 Index and small company stocks ( as measured by smallest one-fifth of the same index).

Anatomy of the Last, Worst Crash

	Nominal Dollars		Inflation Adjusted
Year	S&P 500	Small Cos.	S&P 500	Small Cos.
1973	-14.7%	-39.0%	-23.4%	-47.7%
1974	-26.5	-28.6	-38.7	-40.8
1975	+37.2	+65.7	+30.2	+58.7

Source: Dimensional Funds Advisors, Inc.

If you had the courage to invest in January, 1975, it was a good time. And it would have been a good time to invest year after year as prices see-sawed until the start of the current bull market in 1982. During this period, the average price to earnings ratio for stocks fell and cash dividend yields rose. By the time stocks reached the bottom of their valuation in 1982, earnings multiples were less than half of what they are now and dividends yields were more than double their current rate.

Your perspective on this experience, however, depends very much on whether you were an investor in 1973 or earlier or had the courage to invest after the crash.

• If you had invested in 1973 you did not regain your original purchasing power until 1985. As recently as 1994 your compound real rate of annual rate of return was only 4.5 percent.
• If you invested in 1975, however, you enjoyed a positive return, before and after inflation, and saw your money grow at a real compound rate of 9 percent through 1994.

Few people, however, were investing after the crash. Mutual fund assets remained static year after year and the number of shareholder accounts declined until the early eighties. I remember noting that in the post crash seventies Fidelity Investments, the most powerful of the mutual fund companies, had two shareholders redeeming shares for every new shareholder. Most people were too scared to invest. Mutual funds regularly were folded into other funds and the industry suffered from shrinking employment.

Bottom line: when things get tough and real money is lost, people behave very differently from how they say they will behave when things are good.

Will we see another crash like 1973-74? No one knows. It IS safe to say that it was a rare event and that the most common market event is a correction, not an Armageddon.

Q. In a number of columns you have pointed out that college costs are paid with after-tax dollars. I am not moved. My groceries are paid for with after-tax dollars. As a matter of fact, everything I purchase is paid for with after-tax dollars. That is because the standard deduction is sufficiently high that I am unable to take any itemized deductions. I am not complaining about that and I fail to see the injustice of education being paid for with after-tax dollars.

---A.R., Dallas, TX

A. In a world where you and I, collectively, were trusted to use our money in the way we see fit and most beneficial to us and ours there should be no discussion or complaint about education being paid for with after-tax dollars. There would be a level playing field for all spending and investing. We would choose when to spend and when to invest. We would also choose where to spend and where to invest.

That is not the world in which we live. We live in a country where members of both parties say they favor increased investment in education. Education, however, is treated like a consumer good and is paid for in after-tax dollars while buildings and equipment are paid for with tax-deductible dollars.

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File Name: 961114THDallas Morning News file date: 11/14/96---THUUniversal Press Syndicate file date: same

 © Dallas Morning News, Universal Press Syndicate, 1996