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Stock slump likely to pass

The stock market is falling. The sky isn't. Major stock indexes are down sharply this summer, despite a rally Wednesday. The closely watched Dow Jones Industrial Average has fallen roughly 700 points from its high. But most investors shouldn't do...

The stock market is falling.

The sky isn't.

Major stock indexes are down sharply this summer, despite a rally Wednesday. The closely watched Dow Jones Industrial Average has fallen roughly 700 points from its high.

But most investors shouldn't do anything differently.

If you're in the market for the long haul, stay there, said Greg Sweeney, chief investment officer for Fargo-based State Bank and Trust.

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If you're a trader, remain a trader, he said.

Stocks rise and fall, but on balance they go up more than down, said Paul Larson, editor of Chicago-based Morningstar StockInvestor. Stocks, though volatile, historically have earned roughly twice as much as cash investments.

"Better a choppy 10 percent (historic annual return in stocks) than a smooth 5 percent," he said.

Even after the recent decline, stocks have enjoyed a strong run.

Consider the Vanguard 500 Index Fund, one of the largest mutual funds with assets of about $120 billion. It tracks the S&P 500 Index.

Though the fund is down about 5½ percent in the past month, it's still up about 3 percent year to date.

It's also up about 13½ percent for the past 12 months and about 10½ annually over the past five years.

Stocks have slumped recently in part because of concern about the effect of subprime loans, or lending to people with a poor credit history.

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Even so, the U.S. economy looks strong, said David Flynn, director of the Bureau of Business and Economic Research at the University of North Dakota.

The bureau projects continued economic growth in 2008 and 2009, although at a slightly lower pace than this year.

Though some investors may not realize it, the recent market slump was useful, said Tom Halstenson of Great Plains Financial in Fargo.

"It takes irrational exuberance out of the market," he said.

When stocks rise faster than warranted by their underlying economics, investors can be set up for major grief, he said.

That's what happened with overpriced technology stocks in the late 1990s, he said.

A final thought: Your age plays a role in how you're affected by the market slump, Larson said.

Investors in or nearing retirement don't want stocks to drop. They're more likely to be selling stock than buying it, he said.

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But if you're a young investor, the market slump is actually a good thing, he said.

Larson referred to the hamburgers-and-stocks analogy used by billionaire investor Warren Buffet:

If you're going to be buying a lot of hamburgers over the next 20 years, you want the price of hamburgers to drop.

If you plan to be a net consumer of stocks (buy more than you sell) over the next few decades, you should be happy when stock prices fall.

"If you're a younger investor, this can be a good thing," he said of lower stock prices.

Readers can reach Forum reporter Jonathan Knutson at (701) 241-5530

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