Write this in giant letters and put it in a prominent place, such as on your fridge: EMERGING MARKET FUNDS ARE NOT FOR FOLKS WHO CANNOT AFFORD TO LOSE THE MONTH'S MILK MONEY.
If that sounds harsh, remember that even proponents of overseas investing argue that putting money in an emerging-market fund means considerable risk.
"In general, you should always be diversified," with some of your assets in "foreign or overseas markets," says Russ Kinnel, associate editor of financial-information firm Morningstar Inc., in Chicago. But with emerging markets, "you must make certain to limit your exposure and your risk," he says.
Emerging markets are nations with developing economies, such as Brazil, China, India, and Argentina. Financial advisers often suggest investing in these countries because they boast higher rates of growth than do developed economies, often 10 percent a year or more, compared with 3 percent or less for industrial powerhouses like the US and Germany.
The three main regional areas for emerging markets are Eastern Europe, Latin America, and Asia, excluding Japan.
The question of how much - and when - to invest in emerging markets is perhaps more pressing now than in recent years, given the currency crisis ripping through overseas economies.
Some prominent mutual-fund groups, for example, now urge clients to buy into emerging-market funds on the premise that these markets have been beaten down so much that they are ready for a rebound.
Brazil's market, for example, is off some 50 percent for the year. Argentina is down more than 50 percent. Mexico is off about 44 percent. Russia's market has suffered so badly that many investors have given up checking daily market quotes.
When you consider emerging markets, selectivity is crucial. Mark Holowesko, for example, a global superstar of the Templeton group, says he now finds bargains for his funds in Hong Kong and Singapore, although he remains cool on Malaysia and Indonesia.
Heading for the bottom
Still, some analysts urge caution on all emerging markets for now, in the absence of a concerted international currency-reform program.
"We're telling our readers to sell" when it comes to emerging-market funds, says Sheldon Jacobs who publishes the No-Load Fund Investor, in Irvington-on-Hudson, N.Y.
"The largest losses may be behind us now. But it's too risky" to get back into emerging markets just yet, Mr. Jacobs says. Investors should first wait for those nations to undertake meaningful economic reforms, he says. Until then, he believes investors are better off "buying large-cap US equities."
The sell-off in these markets has hit Latin America especially hard in recent weeks. And the trend seems unlikely to change soon, given the potential for worsening currency problems.
Waiting for rescue
Asia remains mired in recession. Eastern Europe looks wobbly because of Russia's woes.
"Without an international money 'rescue mission,' we are forecasting a recession for Latin America in 1999," says Jos Rasco, an economist with investment firm Hoenig & Co., here. "Investing abroad is always risky; that is especially the case with emerging markets right now," says Mr. Rasco.
Yet, many investors continue to plow money into such funds in hope of whopping gains over the long run, especially if the global monetary crisis eases and these nations resume their high-powered growth.
The Montgomery Emerging Markets Fund, for example, produced a return of 59 percent in 1993. The Lexington Russia Troika Dialog Fund returned well over 50 percent annually until that market spiraled out of control in the past year.
In buying into an emerging-market fund, "you have to set limits," says Russ Kinnel, of Morningstar:
* If you already own international or foreign funds, check your portfolios to see if the funds have exposure to emerging markets, he says. If so, you may not need to buy into an emerging-market fund at all. (That might also be a signal to sell such funds, depending on your outlook.)
* If you do buy in, invest only a small amount that you can afford to risk, he says. Use dollar-cost-averaging to protect against market zigzags. The amount will vary between individuals, but most experts say that small investors should not invest more than 5 percent of their overall portfolio in high-risk funds, including emerging-market funds.
* "You really have to have a long investment time frame" for emerging-market funds, Kinnel says. If you need the money in the next year or so, you are probably better off taking a pass on a developing-nation fund.