Emerging Concern on Overseas Investments

The iShares MSCI Brazil Index (EWZ Quote) delivered a hefty 52.7% return in 2005. The trailing one-year return has been in the range of 70% -- but this very good ETF has been dropping in price for the last two weeks and was down another 6.2% Monday. There are also a number of regional funds -- such as the excellent (FLATX Quote)Fidelity Latin America fund -- that have extensive Brazilian exposure and once delivered exceptional returns as well. The Fidelity Latin America fund, for instance, returned 55.2% in 2005 and gave investors broader diversification. But that fund is also coming down hard in recent weeks and Brazil's Bovespa fell another 3% Monday.

You can invest in Chinese equities via a number of exchange-traded, as well as, mutual funds. I happen to like the iShares FTSE/Xinhua China Index (FXI Quote). However, it has begun to plummet as well recently and was down another 6.6% Monday. The (DPCAX Quote) Dreyfus Premier Greater China and (GCHAX Quote)AllianceBernstein Great China '97 are also very good funds with a China focus. And they, too, have begun to tumble.

On the India front, the Morgan Stanley India Investment fund (IIF Quote) once delivered top results. It posted a three-year average return of over 74%, but is down 13.5% in recent days and another 9% Monday. (ETGIX Quote)Eaton Vance's Great India A fund delivered 45.1% in 2005, but is down about 8.5% for the past week; on Monday, Bombay's BSE Index fell 4.2% after being down more than 10% intraday.

On one hand, the 2005 returns for these kinds of funds were blockbuster. And that caused even more investors to buy in. On the other hand, the recent declines are not minor "downdrafts." They probably herald the burn-off of some of the substantial speculative excess in emerging-market funds.

High returns come with high risks, and the risks of investing in emerging markets are extremely high. When you invest in a single-country emerging-market fund, you are narrowly concentrating your investment in a limited number of stocks in a generally high-risk, often less-efficient market. Such funds are subject to foreign-exchange turmoil and performance whiplash. And even after their very recent declines, funds focused on Brazil, India and China still contain a large amount of speculative markup.

Should you buy in? I strongly recommend against it. The stock markets of these countries are absolutely overheated. You'll be coming late to the party. And if you currently own these kinds of investments, this may be a good time to sell your positions, take profits and wait for prices to simmer down even more.

Recommendation No. 1: Preserve your profits and reduce your emerging-market positions now.

Recommendation No. 2: When you do move back into emerging-market investments, consider funds having a broader international mandate, instead of a single-country focus. Let professional investment managers judge the very different emerging markets for you. And let them decide when to hold Chinese, Brazilian or any other specific market's equities.

Some excellent funds that will give you this kind of exposure are the (JETAX Quote)Julius Baer International II A fund and the (VGTSX Quote)Vanguard Total International Stock Index, an index fund I happen to hold that gives you some 10% to 15% exposure in emerging-market stocks and the balance in Pacific and European equities.

Now is a time to be leery of country-specific China, Brazil and India funds. If you buy them today, you'll still be buying speculative froth. If you own them, take your profits and move to broader exposure. Investments in the equities of Brazil, China and India have outstanding long-term prospects, but buying in right now is simply not advisable.