"U.S. retail sales fell off a cliff in September, plunging by 1.2%," the Associated Press reported. If the AP's writers and editors would like to see what a cliff looks like, they should check out Vanguard Emerging Markets Stock Index Fund, which tracks an MSCI index, and eyeball its performance chart.

From late 2002 to late 2007, this fund rose like Everest, from barely $7 a share to nearly $36. Then the slide began, accelerating to a plummet in the fall of 2008. Through October, the emerging-markets fund had a one-year loss of 56%—and a drop of nearly 29% in four weeks. By contrast, the Vanguard 500 Index Fund, which tracks the S&P 500, looked like a safe haven, down a mere 36% in 12 months and 18% in four brutal weeks.

Of course, the Vanguard fund was not alone. All emerging-markets funds have had similar up-and-down records over the past six years. Even after the recent carnage, emerging-markets funds had positive returns for the trailing five years, while the S&P 500 had gone nowhere.

Forecasting the Future

Does it make sense to put money into emerging-markets stocks or funds now, at the current depressed prices? Perhaps, but planners may do well to move cautiously. If you understand why emerging markets have gone under, especially in the second half of the year, you can make an informed decision about the future.

Part of the decline was due to fears of a global economic slowdown, and these fears were exacerbated by concerns about the world financial system. "There has been a flight to quality," says Meghan Bergman, vice president of asset management at Lenox Advisors in New York. "Investors are moving to assets perceived as being the least risky, such as cash and U.S. Treasuries. At the same time, assets perceived as being the most risky, such as emerging markets, have suffered."

In addition, emerging markets, such as Brazil and Russia, are heavily dependent on commodities such as energy. As the prices of oil and other raw materials have fallen, so have the profit prospects and stock prices in those countries.

Around the world, investors have reacted—perhaps overreacted—to the bad news. "Emerging markets tend to overshoot on the upside and the downside," says Bob Markman, who heads an investment management firm in Edina, Minn. "If the fundamentals suggest a 65% drop in stock prices, they might go down by 85% before recovering."

The trends that have hurt emerging markets may not abate anytime soon. "If you buy emerging markets hoping for a quick rebound, you're asking for trouble," says Bill Rocco, a senior analyst at Morningstar. "No one knows how long this meltdown will last."

Markman believes some are too cavalier about how bad the global recession or depression may be. "We might see a worldwide slowdown that doesn't resemble anything in the past," he says. "A lot of pain may yet be in store for emerging- markets investors, so I would get out or at least cut back on those stocks now."

Bergman doubts emerging markets will bounce back before developed markets. Investors' confidence may return in 2009, she says, but they're unlikely to choose speculative asset classes.

Not all experts are so negative. Todd Henry, emerging-markets equities portfolio specialist at T. Rowe Price, says the basic story that attracted investors to emerging markets from 2003 to 2007 is still in place. "Growth rates are higher than in developed markets," he says. "China is industrializing. In the emerging markets, there is a rise in consumer spending and more stable macroeconomic management. That hasn't changed."

In fact, it might be a better time to invest in emerging markets than in 2006 or 2007, when money was pouring in. "For investors who missed the great surge in emerging markets, this might be a once-in-a-decade opportunity to get in at reasonable valuations," Henry says.

In October 2008, the MSCI index was priced at 1.0 times book value, Henry points out. "Just a year earlier, in the fourth quarter of 2007, the index traded at 2.9 times book value," he says. "Today's price-to-book ratio is about what it was in 2002, at the end of the last bear market and in 1998, when the Asian financial crisis drove emerging-markets stocks down. In most emerging markets, the ability to deal with such a crisis is better today than it was then."

Markman is expecting a long, strong bull market. "Emerging markets might be up 300% to 400%," he says. "This isn't something that has to be caught early. I'm quite comfortable letting someone else make the first 10% to 15%."