Maybe it's not such a small world after all.
With the domestic stock market percolating and certificate of deposit yields strong, the once-booming emerging markets have become submerged markets.
The rush of new money has been short-circuited. Many investors yanked money out quickly, the worst way to play these younger markets.
Because emerging markets declined 2.42 percent in dollar terms last year, compared to a gain of 3.36 percent by major world markets, it's easy to forget that investing in them can still make sense.
However, an investor must be patient and have long-term goals, never putting more than 10 percent to 20 percent of a portfolio in these volatile -- yet potentially rewarding -- issues.
Each country has a unique history, economy, financial structure and stock market. The worldwide trend toward free market systems doesn't mean each nation evolves into a carbon-copy United States.
Mexico, which recently seized one of its largest banks, and China, in the midst of a bond-trading scandal, showcase the unpredictability. Argentina's bond and stock markets are reeling from a raft of economic problems.
Yet availability of emerging market vehicles is growing, underscoring the fact they're here to stay. The first fund, Lexington Worldwide Emerging Markets Fund, opened in 1969. The second didn't arrive until 1987, and just a dozen existed four years ago. Today there are 89 funds.
"These markets are like children whose maturing process will take awhile, including pain with rewards," warned J. Mark Mobius, portfolio manager of Templeton Developing Markets Trust, who is especially disappointed with the performance of Turkey because of "outright thievery" by top management at some of its companies.
Still, Templeton recently opened offices in Russia and India and is in China "in a big way," Mr. Mobius added. He has long-range hope for reform.
Others are less optimistic.
"Money invested in emerging markets should be money you're prepared to lose, for it's like going to the craps table in Las Vegas," said Norman Fosback, editor-in-chief of Mutual Funds magazines and several Fort Lauderdale, Fla.-based investment letters.
Diversified U.S. portfolios will make money over 10 years, but emerging markets "can lose money from many different angles," he added.
"Anytime you have the Federal Reserve pulling liquidity from the global financial system, there will be cracks and fissures," noted Douglas Johnson, senior international investment strategist with Merrill Lynch & Co. "Emerging markets withstood a lot of pressure until last September, but there then was downside volatility."
Investors must realize (1) emerging markets exhibit upside and downside volatility, (2) many markets are small with limited depth, (3) their economies can be dependent on regional and global trends, (4) political events can overwhelm price activity, and (5) currency can be a key performance aspect.
Values of many markets are no longer inflated.
While they provide an opportunity for diversity and higher returns, investor confidence is a problem.
"Because emerging markets were coming down from the 1993 high, people couldn't believe they could go farther and took profits," said Kim Rebecca, analyst with the Morningstar Mutual Funds investment advisory. "Some markets have fallen so hard and far it's hard to believe they won't recover somewhat, but you can't expect to get in and pull out successfully in one year."
Best-performing emerging markets funds the past 12 months, according to Morningstar, were:
* Templeton Developing Markets Trust, St. Petersburg, Fla.; $1.9 billion in assets; 5.75 percent "load" (initial sales charge); down 15.48 percent.
* GT Global Emerging Markets "A" Shares, San Francisco; $266 million; 4.75 percent load; down 17.66 percent.
Remember market differences.
Latin American markets fell 5.27 percent last year, with tumbles in Mexico, Argentina and Venezuela, vs. gains in Brazil, Peru, Chile and Colombia. Emerging Asian markets slid 1.24 percent, with declines in China, Indonesia, Malaysia and Thailand but advances in Korea, Taiwan and India. Turkey and Israel nose-dived, while Nigeria and Portugal prospered.