July 15, 2011
Nanigian's research suggests that too much of a good thing may eventually lead to disappointing investment performance.
A 2010 graduate of the doctoral program in Personal Financial Planning at Texas Tech was invited to present research from his doctoral dissertation at the New York Stock Exchange during the annual board meeting of the Journal of Indexes last month.
David Nanigian’s research, titled “The Impact of Passive Investing on Corporate Valuations,” finds that periods of high investment into S&P 500 index mutual funds led to temporary increases in the prices of stock in the index.
“David's article is the first to show a direct relation between large monthly flows into S&P 500 index funds and a simultaneous increase in valuation of stocks in the S&P relative to similar stocks outside the index,” said Michael Finke, co-author and faculty advisor on the dissertation research.
“This is important because it raises the possibility that passive index fund investing may eventually lead to stock prices that don't accurately reflect the value of the company. While previous research and many investment advisors recommend the use of passive mutual fund investments, David's research suggests that too much of a good thing may eventually lead to disappointing investment performance if S&P stocks become overvalued.”
Finke notes that, “the golden age of index investing has led many investors to avoid costly, under-performing mutual funds. However, too much index fund money flowing into a limited number of stocks may push prices beyond their true worth. Choosing broader indexes may be a better solution for investors in the future.”
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