Dec. 8 (Bloomberg) -- It's always nice to see patience rewarded in investing -- and even nicer if it happens without a long wait.

Just ask investors, myself included, in mutual funds and exchange-traded funds that specialize in emerging-markets stocks. We have enjoyed just such a happy experience in 2006.

A knockout punch of selling in May and June wiped out about 25 percent of our money. But as a timely Bloomberg News story noted on Tuesday of this week, by early December we got it all back.

Times sure have changed for these markets, in up-and-coming economies around the world from South Korea to South Africa, India to Brazil. When the emerging markets hit a spell of trouble in the early 1990s, it took them 10 years to recover. Now they can do it in six months.

There's a big difference in the economic fundamentals too. Back in the 1980s and early 1990s, they were a story of hazy, far-off possibilities. Now, led by China and the other ``BRIC'' nations of Brazil, Russia and India, they are moving into a central role in a newly globalized world.

It's been a great story for investors. The Ishares MSCI Emerging Markets Index fund has soared at an annual clip of almost 40 percent since it made its debut in early 2003 -- even with intermittent setbacks like the aforementioned May-June sell- off this year.

Lists of the top-performing U.S. mutual funds in 2006 bristle with single-country and regional funds from within the emerging-markets realm. A Bloomberg screen I looked at recently of the top 15 funds through early December included four China funds, two Russia, and one each from Mexico, the Caribbean Basin and Singapore.

Top Spot

One of the top gainers, the closed-end Greater China Fund managed by Baring Asset Management Inc., sported a return of 89 percent since last New Year's.

Gratifying as such results may be, they also raise warning flags. ``Emerging markets remain expensive despite the recent sell-off,'' said the investment firm of Lehman Brothers Holdings Inc. in a November note to clients. ``Emerging market equities may not be as resilient as developed market equities in the face of slower global economic growth.''

In any risky investment, it is a good idea to crash-test one's position every now and then. This can be done simply by calculating what a sudden decline might look like in dollars and cents, or euros, or whatever currency applies.

As it happens, emerging-markets funds make this exercise easy by regularly demonstrating in real life the kind of losses that can occur. A brief look at the history of the Morgan Stanley Capital International Emerging Markets Index gives us plenty to work with.

Big Swings

Reading from a table of the index's annual changes, we can estimate that if you had invested $100,000 in the index at the end of 1988, you would have seen your stake balloon to about $400,000 by the end of 1993. Then, in the next five years, about $180,000 of your new-found wealth would have disappeared.

You got a big chunk of it back in 1999, but then $200,000 or so vanished again in the bear market of 2000-02. Losses of 25 percent, 35 percent or more are not just possible in this market, they happen over and over again. Sometimes they come quickly, sometimes they take years.

Granted, these markets and the economies in which they are situated have matured a lot in the past couple of decades. They now trade to a significant degree on real and present growth, not just hopeful visions for the future.

They have gained a measure of respect that wasn't accorded them in the 1990s, when a particularly long spell of disappointing results earned them the sobriquet ``submerging markets.''

Line of Fire

Even so, these markets remain vulnerable to political and economic surprises that may hit them harder than stocks in developed markets such as the U.S. Some new terrorist attack, or something like a crisis for the dollar in foreign exchange, would fit that description.

The way the world economy is developing, with more and more interconnections from one side of the planet to the other, emerging-markets stocks present an opportunity that can't be overlooked. With all that glitter, though, their risks are as big as ever.

(Chet Currier is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Chet Currier in Los Angeles at ccurrier@bloomberg.net

Last Updated: December 8, 2006 00:04 EST