1980s Were Terrific for Small-Time Investors

No doubt about it--the 1980s were a great decade for individual investors, perhaps the greatest ever. The average small investor tripled his money. The Dow Jones index of 30 industrials set records unthinkable at the start of the period. Tax rates and inflation fell. New products--such as money-market mutual funds and interest-bearing checking accounts--flourished.

Of course, we had our setbacks, too. The 1987 crash, big deficits, a decade-ending real estate slump.

Here’s a listing of the decade’s top 10 personal finance trends and events, ranked by their impact on individual investors:

1. Taming of inflation. The lowering of inflation from 11% at the beginning of the decade to below 5% arguably was the single most important factor in making financial assets shine during the 1980s. Investors finally earned real returns on their money versus inflation, a sharp reversal from the 1970s, when returns after inflation were often negative. This factor, more than any other, made the 1980s the best decade for investing in the postwar era.

2. Deposit deregulation. Banks and savings and loan associations became free to offer market rates on all certificates of deposit and other savings accounts. Institutions nationwide also were allowed to offer interest-bearing checking accounts. These changes gave unprecedented choices to savers.

3. Tax reform, 1981. Whether or not you agreed with it, Ronald Reagan’s first major tax legislation, the Economic Recovery Tax Act of 1981, had impact. It dropped the top individual tax rate from 70% to 50% and opened other tax breaks. But it also resulted in an unprecedented federal budget deficit that is still responsible for interest rates remaining higher than they otherwise would be.

4. Tax reform, 1986. This effort--aimed at simplification although ending up being more the opposite--reduced tax brackets from 14 to three, cut the top individual tax rate to 33% from 50% and made capital gains taxable as ordinary income. It also effectively killed most tax shelters.

5. The bull market. The Dow started the decade at a measly 824. Since bottoming out in August, 1982, the Dow has climbed nearly 2,000 points, enriching millions of investors directly through stocks or mutual funds, or indirectly through pension funds.

6. Growth of the adjustable-rate mortgage. The ARM--which reached its heyday in the 1980s--allowed many, particularly in California, to afford a home. But it also shifted the risks of changing interest rates to homeowners and away from lenders.

7. Real estate boom and bust. Rousing home price rises made easy profits for many homeowners in California and other hot markets. But they also priced millions of others out of affording the American Dream--a major cause for today’s sluggish market.

8. Mutual fund boom. Fund assets grew tenfold to nearly $980 billion--equivalent to about $4,000 for every man, woman and child in the country. A main source: the explosion in money market funds, which introduced many investors to the fund concept and thus laid the groundwork for growth in stock and bond funds.

9. The crash. The 508-point nose dive on Oct. 19, 1987, seemed like Armageddon at the time. Although the loss has since been made back, the crash legacy remains, and it continues to scare millions of individual investors away from stocks, making them much more cautious about their investment choices.

10. Expansion of individual retirement accounts. Investors were allowed to make tax-deductible contributions to these popular retirement savings vehicles regardless of whether they had retirement plans at work. However, the Tax Reform Act of 1986 restricted this privilege.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters and phone calls. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.