INVESTMENT OUTLOOK : ASSESSING 1987 : The Bull Stops Here : Stock market’s crash dominates a year that saw the fall of everything from ZZZZ Best to the peso

This year will go down simply as the Year of the Crash.

The 508-point nose dive in the Dow Jones industrial average on Oct. 19 and its aftermath easily will rank as the top investment story of a year marked by other major--and some not so major--changes in the investment landscape.

The stunning crash ended a five-year bull market in which the Dow had more than tripled and talk had become commonplace of it reaching 3,600. In a single day, the Dow lost 22.6% of its value. Between Aug. 25, when the Dow peaked at 2,722.42, and the close of trading on Black Monday, the Dow had lost 36.1% of its value, or about $1 trillion.

All Americans were hit by the collapse, regardless of whether they directly owned stocks or mutual funds. Workers and retirees saw the value of their pension funds decline. Colleges and nonprofit organizations saw the value of their endowments shrink.

The crash also prompted investors to re-evaluate their strategies, as risk had been reintroduced to a market that for five years had barely seen any major correction. While some investors saw the crash as an opportunity to buy stocks at bargain prices, others rushed instead to safer Treasury bills, certificates of deposit and money market funds as part of a classic flight to quality.

Serious questions arose about the markets and the economy. Will there be a recession or depression? Do the markets need more regulation, and what kinds? Will more individual investors shy away from stocks, leaving the market increasingly to professionals? Will brokerage and mutual fund firms suffer lean times?

Experts also debated why the crash occurred. Blame was placed on everything from computerized program trading to the bulging U.S. trade and budget deficits, from higher interest rates to the departure of Paul A. Volcker as chairman of the Federal Reserve Board and from inexperienced yuppie traders to simple panic.

Perhaps the main reason for the crash was that stocks had simply gotten too high. According to noted Harvard economist John Kenneth Galbraith, the market was simply driven up by speculators who believed that the bull market would keep going higher before turning down. When that belief began to erode, panic and a crash was inevitable.

But the crash wasn’t the only significant investment development of 1987. The year also saw more nails hammered into the coffin of tax shelters; new, stratospheric price records for art sold at auction, and roller-coaster rides for interest rates.

Here is a somewhat irreverent look at the investment highlights--and lowlights--of 1987:

Reversals of the Year: E. F. Hutton’s new advertising campaign. It used to be that when the brokerage firm talked, people listened. Now, “when people talk, E. F. Hutton listens.” The firm claims that the change was in the works before the crash.

Ivan Boesky. Wall Street’s premier insider trading felon, banned from the securities business for life, now has gotten religion. He is a full-time student of Talmudic studies at the Jewish Theological Seminary in New York.

Hassles of the Year:

The new W-4 withholding form. Developed by the Internal Revenue Service to reflect changes under tax reform, but never tested upon the public, the complicated W-4 caused such a taxpayer uproar that the IRS was forced to issue a simplified version.

Trying to get through by telephone to your no-load mutual fund or discount broker on Black Monday.

Acronyms of the Year: Tax reform spurred a host of creative alphabet plays. The best were PIGs and PALs. PIGs, or passive income generators, are partnerships that produce income offset by losses from old-fashioned tax shelters, known as passive-activity losses, or PALs. In other words, PIGs are a PALs’ best friend.

Things That Went Down:

Boyd Jefferies and Martin A. Siegel, who joined Dennis Levine, Ivan Boesky and other investment bankers, speculators and brokers caught with their hands in the insider-trading cookie jar.

Savings rate. Despite tax cuts, which increase the after-tax return of savings, Americans’ propensities to save as a percentage of their total income continued to fall in 1987.

The dollar. It has fallen about 12% against the Japanese yen since late February.

The market for newly issued municipal bonds. Thanks to limitations under tax reform and rising interest rates, volume of new issues plummeted in 1987, prompting widespread staff cuts among dealers.

The attractiveness of individual retirement accounts. “Everybody’s tax shelter” took a hit from tax reform, which made them much less attractive for higher-income individuals with company pension plans.

Bond prices in April and early May. Thanks to sharp rises in interest rates, prices of municipal bonds fell as much as 15% in that period.

Sales of tax-oriented private limited partnerships. Sales of these tax shelters for the wealthy, their benefits rolled back thanks to tax reform, were off 65% through the first seven months of 1987.

Things That Should Have Gone Down but Hardly Did:

Credit card interest rates, particularly among the biggest California banks. While the general level of interest rates has fallen sharply in the past two or three years, these banks have cut credit card rates scarely at all. First Interstate Bank of California, for example, has not budged from a rate of 21%. Among the banks’ excuses: high processing costs and high credit losses.

Expensive business lunches. Even though tax reform limited writeoffs on business meals and entertainment to 80% of the cost, restaurants report that business seems as strong as it was last year.

Other Things That Crashed:

The Mexican stock market. It was hit harder than any other market in the world, at one point declining about 75% by the end of November from its early October peak.

The Mexican peso. Stunned by the collapse of Mexican stocks, investors abandoned the peso as well, fleeing to U.S. dollars or other currencies. On one day alone, the peso fell 25% in value. Overall it is off about 60% from the first of the year.

Things That May Eventually Crash:

- Art market prices. The record $53.9 million paid by an unidentified foreign bidder for Vincent Van Gogh’s 1889 masterpiece “Irises” showed that the finest pieces of art could still fetch astronomical prices, despite the stock market crash. But many experts think that this is a bubble waiting to burst. The art market crashed soon after the 1929 stock debacle.

- The Japanese stock market. Price-earnings ratios--the multiple of stock prices over annual earnings per share--on Japanese stocks are hovering above 50, compared to less than 20 on U.S. equities. The Tokyo stock market did not fall as much as the U.S. market in the crash, and in fact was up nearly 30% for the year even after the crash.

Things That Went Up:

Mortgage rates, the prime rate, Treasury securities rates, interest rates in general.

The number of organizations offering credit cards. Membership groups ranging from the Sierra Club to the American Assn. of Retired Persons, as well as airlines and other non-financial services businesses, continued to offer their own credit cards to members. Unfortunately, the rates and fees on many of these cards were just as high as those offered by banks.

Copper prices. They have nearly doubled this year, thanks to tight supplies.

Things That Should Have Gone Up But Didn’t:

Sales of earthquake insurance. Despite the Oct. 1 Whittier quake and its aftershocks, sales of earthquake insurance have not taken off. The high premiums and hefty 10% deductibles apparently are scaring off homeowners.

Gold prices following Black Monday. Many experts thought the stock market crash would push investors into precious metals, but investors apparently figured that with the crash, a recession and deflation were more of a threat than inflation.

Four of the Safest (and Most Boring) Investments of the Year:

U.S. savings bonds. Uncle Sam won’t let you lose your principal or interest. What interest? Investors buying them between May and October earned a mere 5.84%.

Certificates of deposit. Perfectly safe if covered by federal deposit insurance.

Money market funds. A great refuge for people unhappy with having to tie up their money in bank CDs.

Utility stocks. They lagged the bull market but did not fall as much in the crash.

The Five Dumbest Investment Moves of the Year (or Any Year):

Putting all your money into one investment.

Buying mutual funds with high front-end loads (commission charges), annual 12b-1 fees, back-end loads and redemption fees. With just a little research, investors can find funds with similar performance records charging no loads or 12b-1 fees whatsoever.

Investing in anything sold by fast-talking phone salespeople promising quick profits in commodities, futures and options. Law enforcement agencies in Los Angeles and Orange counties have formed “boiler room” task forces to crack down on the problem, but as long as there are suckers born every minute, these swindlers will continue to thrive.

Investing in anything you don’t understand. Sadly, people do this all the time.

Playing the California lottery for profit. A far worse payout than any crap table or slot machine.

Most Surprised Investors of the Year:

Investors who thought their “government guaranteed” bond mutual funds couldn’t go down in value. To their dismay, they discovered that the government guarantee only applied to the interest payments, and did not protect the bonds from declining in value when the general level of interest rates rose. Thanks to sharply rising interest rates, some bond funds declined as much as 15% in April and May.

Investors who bought ZZZZ Best stock at $16 a share in April when the Reseda carpet-cleaning company was riding high with founder Barry Minkow. By July, when news of its allegedly fraudulent activities was fully public, the stock had plunged to a mere 75 cents.

The Year’s Top Investment Fads to Be Wary Of:

Master limited partnerships. These limited partnerships, whose shares are traded just like stocks, gained favor following tax reform because all profits pass through to shareholders without the partnership having to pay corporate income tax. But experts warned that their high initial advertised yields may not hold up. And Congress is considering eliminating their tax benefits.

Home equity loans. Thanks to tax reform preserving deductions for mortgage-related interest, these loans boomed in 1987. But borrowers may not have been as aware of their high loan-origination fees, lack of caps limiting rises in interest payments and balloon payments. Also, Congress is threatening to limit their tax deductibility.

Buying closed-end mutual funds at their initial offering price. These funds, which sell a set number of shares that are then traded on stock markets, enjoyed a mini-boom with the bull market. But investors who bought shares at their initial offering almost always lost money, as prices soon fell.

Single premium life insurance. These policies, which offer insurance benefits plus accumulation of investment earnings on a tax deferred basis, have surged in popularity following tax reform. But investors often were not as aware of their large sales charges and management fees, high surrender charges and often below-market investment returns. Also, Congress may roll back their tax benefits.

The new stock market CDs offered by Chase Manhattan Bank. One, a “bull” CD, allows investors to profit from a rise in the Standard & Poor’s 500-stock index, while the “bear” CD allows one to profit from a decline. In both cases, the principal is guaranteed. But if the market goes the opposite direction from the way you bet, you could end up with little or no interest earnings.

Tax Shelter of the Year:

Your home. In a year when tax reform wiped out dozens of tax breaks, home sweet home with its mortgage deductions again proved to be the best shelter, from the weather as well as taxes.

Smartest (and Maybe Luckiest) Investment Moves of the Year:

Selling stocks short or buying put options on or about Aug. 25, when the Dow peaked. Either of these bets on lower stock prices earned investors a tidy profit from the crash.

Owning shares of gold-oriented mutual funds in the first quarter. These funds, which invest in the stocks of gold-mining firms, were up an average of a whopping 49.4% in the first three months of 1987. Reason: investor anticipation of higher inflation, which in turn would trigger a rise in gold prices.

Selling those same gold-oriented mutual funds just before the crash. They were one of the worst hit in the crash, proving that what goes up sometimes comes down.

Grin and Bear It Award:

This goes to Sam M. Walton, the world’s richest man and founder of Wal-Mart Discount Stores. His reaction to losing an estimated $1 billion in the value of his Wal-Mart stock from the market crash: “It was paper when we started, and it’s paper afterward.”