The news isn't all bad for stock-market investors these days.
Just consider the bumper crop of potential capital-loss tax write-off the market decline of 1990 has produced.As a note of cheery reassurance, that may have a hollow ring. But a good many stock traders will be thinking along precisely those lines through the remainder of the year, seeking a chance to shift some of the burden of their ill fortune onto the shoulders of Uncle Sam.
The basic rule they follow is that losses on financial investments - not just stocks but also other securities like bonds and mutual-fund shares - can be deducted within limits against income when you fill out your tax return.
First, a loss realized on a security sold during the year is used dollar for dollar to offset any capital gain you might have realized, such as on the sale of a stock.
If you have losses that exceed your investment gains, they can normally be deducted against your other income up to a limit of $3,000. Net losses of more than $3,000 can be carried forward indefinitely to future years.
Hence the annual exercise known on Wall Street as "tax selling," in which investors juggle their portfolios to minimize the amounts they will owe the government.
A generation ago, tax selling often was cited as a primary force behind the market's fluctuations in the closing weeks of a year. In recent years it has drawn less attention.
That is partly due, analysts say, to the increasing dominance in the marketplace of investing institutions such as pension funds that are exempt from current taxation.
In addition, there have been relatively few losses for investors to consider taking in most years of late, thanks to the mighty bull market of the 1980s. Even in 1987, when the market crashed in October, stocks wound up the year about where they started.
Not so in 1990. Through the first three quarters of the year the Dow Jones industrial average was down about 11 percent, and some broader market measures showed losses twice that size.
Thus many observers believe tax selling could put some extra pressure between now and mid- to late December on stocks such as the depressed bank issues and small "growth" companies that have been particularly poor performers to date.
In their dealings with individual investors who are considering selling a losing investment to get the tax benefits, brokers generally advise them to act early and avoid the December rush.
What if an investor wants to take a tax loss, but also wishes to keep his or her position in a stock, expecting better times ahead?
To avoid a "wash sale" that invalidates any tax loss, you cannot sell the stock and buy it back within any 30-day period.
Of course, selling in, say, mid-November and buying a stock back 31 days later exposes you to the risk of missing a sudden rally in the interim.
An alternative strategy is to "double up," buying an additional lot of the security first and selling the old investment at least 31 days later.
"Although this will enable you to maintain your original investment position, it will also double your risk for at least 31 days," points out the Consumer Reports annual Guide to Income Tax Preparation.
"Your decision should be based primarily on whether you want to own the stock, not on some perceived tax benefit that increases your risk. Otherwise, if the stock continues to drop, you have simply increased your loss."