Understanding "Window Dressing"

Window dressing is an arguably shady practice employed by many mutual fund managers. Mutual fund managers typically report to the public on their funds' holdings once per quarter. Managers want to look savvy to impress their existing shareholders and attract new shareholders. Therefore, they'll sometimes sell lackluster investments they've held for a while and buy recent stellar performers -- just so the fund's holdings on the day of record look good.

For example, the Kitten Kaboodle Fund (ticker: MEOWX) might have spent the last few months languishing. Rather than reveal that it holds large positions in poorly performing companies, the manager might sell off some regrettable holdings and load up on recent market darlings to look good. This is window dressing.

You might be pleased to see Wal-Mart (NYSE: WMT  ) and eBay (Nasdaq: EBAY  ) among your fund's holdings, but that just means they were held on one particular day -- the day that attendance was taken. The fund hasn't necessarily owned those stocks for a long time, participating in their gains. For all we know, the fund might have had most of its money sitting in the stock of companies such as Giddyup Buggy Whips, Inc. (ticker: WHOAA) for most of the quarter. But, as long as it sells most or all of those shares by the date on which it reports, you'll never know.

For an eye-opening education on mutual funds, read John Bogle's Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor. You can also learn more about investing in mutual funds in our Mutual Fund area, and zero in on our index fund information there. Additional info about funds and stocks is found in our Investing Basics area.

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