Tip 4: Be Aware of Window Dressing

At the end of each month, quarter, and year, fund managers want their portfolios to look good. They sell or trim stocks that have lost them money and buy stocks that have done well. Even though fund managers’ overall portfolio performance won’t change much at these specific times, it is all about appearance–what’s on the books–to reassure investors that the people using their money are smart and making profitable choices. In the end, this strategy may work out for the fund managers, if the winners keep on winning, but it may fail as well and just hide poor decisions for a brief time.

For retail investors, it is good to know that this behavior may cause certain stocks to fall even further or rise even more–at least in the short term. If your money is in a fund, it is also a reminder to take a closer look at how well the fund manager is actually doing in order to avoid being lulled into a fake sense of security.

For retail traders, knowing about this behavior may be profitable. Study a stock or ETF and see if there is a pattern at these end points. If so, then, it may be worth either cutting losses beforehand, adding to winners, or waiting for the drop to buy low with the expectation of a short-term bounce.

While these patterns aren’t guaranteed to happen every time, they are good to keep in the back of our minds when a new month, quarter, and year come up.


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