Emerging markets have had an exhilarating rise, with a typical basket of stocks tripling in value from the lows in 2002 to the peak in early May 2006. The asset group has the expectation of high returns and high volatility. The 15 to 20 percent loss experienced in the last three weeks of May highlights the dangers.

Emerging-market investments probably have a place in your portfolio. While the overall group has strong anticipated growth, emerging countries can have very different situations. Optimal potential securities appreciation requires a stable political environment, a growing population that can generate a vibrant future and a productive economy that is flexible, has liquidity and welcomes foreign investment.

Twenty percent of a portfolio in any one asset class is too much. Enjoy your recent gains and reduce your holdings to a maximum of 10 percent; diversify holdings geographically by style and by size; hold other investments that have low correlation with emerging markets; and review your overall goals to ensure that the group fits with your purpose.

Marilyn Capelli Dimitroff, Capelli Financial Services,
Bloomfield Hills, Mich.

These economies represent one of the most exciting growth stories of this decade. The case for committing a meaningful allocation to emerging markets remains compelling despite their huge run up and more recent pullback. Because you can tolerate volatility, we recommend staying the course.

A more fundamental question is whether your 20 percent allocation is appropriate. While this would be too aggressive for most investors, your personal financial circumstances might make it suitable for you. Because you’ve been riding the emerging-markets wave for a few years, this part of your portfolio has probably become much larger than intended, so rebalancing to a reduced allocation may be prudent.

Finally, you can better manage risk by diversifying your emerging-markets portfolio. Consider investing in private equity and emerging-market debt.

Jim Berliner, Westmount Asset Management, Los Angeles

During the past three years, emerging markets have returned more than 30 percent annually. In May, emerging markets lost over 10 percent. While this is not comforting, it is their nature. On a long-term basis, emerging-market equities should generate among the highest returns with the most volatility.

Many successful investors establish a long-term asset allocation policy and adhere to it. If the value of an asset class exceeds its target allocation by 20 percent (target is 10 percent and actual allocation is 13 percent), the portfolio is rebalanced to its target. Conversely, if the value drops more than 20 percent, the portfolio is rebalanced to its target.

While market timing may be possible, it is unlikely that one can consistently forecast market turns. However, on occasion, an asset class’ valuation may exceed its historic valuation by more than two standard deviations. If this happens, it may be prudent to overweight or underweight the asset class until its valuation reverts to historic levels. I do not believe emerging markets are extremely overvalued or undervalued and do not recommend a short-term tactical change.

David H. Bugen, RegentAtlantic Capital, Chatham, N.J.

Emerging markets were likely the best performer in your portfolio, but returns headed south recently. Such extreme volatility is not unusual: During the 1998 Asian crisis, emerging-markets stocks dropped a heart-stopping 35 percent in only seven months.

Emotions during extreme swings could lead you to buy high and sell low. This may be why your advisor urges you to get out.

Yet there are good reasons for long-term confidence. Emerging-markets companies will remain highly competitive for years, and their domestic markets will grow much faster than our own. Capping exposure at 5 to 10 percent of your portfolio and considering emerging-markets hedge funds may be the best option to balance concern about risk with the potential for high returns.

Milton Stern, Bridgewater Advisors, New York