What is Window Dressing?

You may have seen investors or financial media talk about “Window Dressing” and how it impacts the stock price. Well “Window Dressing” is a term describing the unique strategy many investors employ around year ends and quarter ends to sugar-coat their investment portfolios.

So what is window dressing?

It’s a strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders.

Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. In order to take advantage of this process, the fund managers or investors publishing their performance report will sell stocks with large losses and purchase stocks that are performing well near the end of the quarter. These securities are then reported as part of the fund’s holdings, which now look much better than it did just before the window dressing.

Just to show a very simple example of how simple difference can change the aesthetics of your portfolio:
Before Window Dressing

After Window Dressing

As you can see, just by selling some of the losers and buying up some of the winners, the fund managers’ portfolio can look a lot “better” for the quarterly reports. This concept is what the investors take advantage of before quarter and year ends before their performance reports get distributed.

So what does this mean to the stock market? Well often times, the period right before the quarter end or year end tend to have advancing stocks for those that have been performing well. Well in a market like today’s where the indices rallied 50% since the March ’09 lows, you can bet there are fund managers who are window dressing to make their portfolio look better.

It’s something to keep in mind for you swing/day traders.