A couple of days ago, I read an excellent article written by Bill Donoghue, editor of The Proactive Fund Investor, a weekly newsletter published by MarketWatch.com. In his piece, Donoghue discussed the marketing and advertising of mutual fund performance results. He explained why investors need to be aware that past performance potentially can mislead the public into thinking that a fund is a-okay.

The basic gist of Donoghue’s argument is that because of the bull market of the past several years, fund companies can publish a "bear market-free record for the past three years, and they get to publish a five-year track record with the worst bear market year of 2002 offset by the bull-market recovery year of 2003."

He argues — and I completely agree — that wise investors should research more relevant track records for fund comparisons. Both Donoghue and I feel that a seven-year track record to the end of 2006 would reveal how the fund performed over a full bull- and bear-market cycle. Even better, a longer 10-year performance record would include the overheated dot.com and technology years of the late 1990s, as well as the technology sector meltdown that followed the bursting of the tech balloon.

According to Donoghue, investors also should examine a mutual fund’s track record of the last four bear market years. Then, compare the fund’s performance in those bear markets to indexes of funds with similar objectives to see not only how the funds performed but also to assess how the funds performed relative to their competitors.

I think Donoghue’s idea of comparing the seven-year track record will reveal that many fund investors were unable to reach break-even results over that period. A key reason is that most stock funds took "no defensive action" during three years of the recent bear market between 2000 and 2002, he wrote.

This article really points out what I have been arguing for some time now — namely that financial industry marketers are paid to get you to buy their products and if they have to resort to a little numerical slight of hand, then that’s what they’re going to do.

I think the biggest lesson that we can learn from this experience is to be skeptical when you see performance numbers being thrown around. Always ask what time period is covered by those making fund performance claims and compare the numbers with benchmarks and other similar funds.

It might take a little extra effort on your part, but doesn’t your money deserve it?