Real estate investors should be wary of 'bubble'.

Investors who have given up after three years of down markets are likely to suffer even more losses if they shift heavily into real estate at the peak of an overheated "bubble" in that market, according to a warning issued today by BHCO Capital Management of Dallas, TX, J.E. Wilson Advisors of Columbia, S.C., and The Foster Group of Des Moines, IA. The three firms are members of the Zero Alpha Group (ZAG), a nationwide network of seven fee-only investment advisory firms (http://www.zeroalphagroup.com) managing a total of more than $1.75 billion in assets.

The ZAG members warned that a "rush to real estate" by loss-shocked investors could make a bad situation even worse. Many of the investors now contemplating a jump from stocks to a heavy (or even exclusive concentration) in real estate likely suffered major losses as a result of a lack of equity diversification and the fact that they bought in at the height of the late 1990s market. For these investors, the double whammy of the "money pit syndrome" would result if they were to suffer even deeper losses by buying into the top of a real estate "bubble" prior to it bursting.

However, the ZAG members emphasized that real estate investment trusts (REITs) are an important part of many investors' asset allocation strategies. Not only are REITs a helpful tool in portfolio rebalancing, they can generate much-needed cash flow and, at the moment, are posting good yields. The trio of fee-only financial planners emphasized that they were raising the alarm about investors who are liquidating their investment portfolios in order to put all or most of their savings into such things as vacation homes, farmland, rental apartments and even airport hangars.

BHCO Capital Management president Pat Beaird said: "The urge to overconcentrate in real estate that we're seeing is coming from people who are not our current clients. Instead, these are people who are flailing around without an effective asset allocation strategy in place. Unfortunately, these also are the ones who have been the most adversely affected by the equity market turmoil of the last three years. Investors with a long term strategy see the real estate market as a portion of their portfolio, not an alternative to it."

The ZAG members issued the following reminders to investors who are contemplating the jump from the market to real estate:

* The best long-term returns are in the stock market. If you bail out on the markets now after taking losses, you lose the opportunity that long-term investors will enjoy to ride the market back up when it recovers. According to a Brinker Capital analysis, for the 10-year period that ended March 31, the return on the S&P 500 was 13.26%. It was found that if you drop the best six of the 120 months in that decade, your return would have been sharply lower: Just 8.29%.

* A deliberate approach to asset allocation will beat undiversified "impulse investing."

Investors who have been burned once on an impulse investment (e.g., an overconcentration in tech stocks in the late 1990's) are often prone to make another "bet it all" impulse investment in a vain attempt to make up their lost ground in one fell swoop. Unfortunately, the likelihood of getting burned twice on impulse investing is much greater than the odds of getting it right either of the two times.

* If you want to invest in real estate, look at REITs as part of a balanced financial plan. According to a January 2003 report from the National Association of Real Estate Investment Trusts (NAREIT), a widely used index of single-family house prices gained 5.7% annually on average from 1976 to 2001. Equity REITs produced a 6.1% annual average return on a price-only basis, but posted a much higher annual average return of 15.2% when dividends were reinvested.

* Exercise extreme caution about buying into what may the peak of the real estate "bubble." The 976,000 homes built in the United States were up 7.5% from 2001, according to the Commerce Department. With home prices edging up in most of the U.S., a record 68.3% of Americans now own homes. These figures, which are suggestive that the real estate market has heated up dramatically in recent years, are fueling worries among experts about a possible "bubble" collapse that would drive prices down.