Investors plowing money into hard assets should beware of fools' gold, The Wall Street Journal warns.

Hard-asset funds--those including gold, natural resources and real estate--hold combined assets of nearly $104 billion, compared to $19 billion in 2001.

Although most believe investing in hard assets reduces risk, The Journal warns, the trend will end on a sour note.

In the past decade-and-a-half, the average investor has become far savvier about developing a truly diverse portfolio. Alternative investments are the latest craze, as mutual funds that espouse hedge-fund tactics represent a $41 billion market.

Still, that growth pales in comparison to the 41% jump in inflows to hard-asset funds during 2005.

And while the more diverse one's options, the better, this leap represents unhealthy growth, according to the column. It's called performance chasing, and it always results in investors hitting a wall. 

Hard-asset funds gained, on average 19.1% over the past five years, with precious metals gaining 35.7% annually, compared to the 0.4% growth of the Standard & Poor's 500 index.

Investors should take a lesson from real estate investment trusts. REITs were not considered a hot investment 20 years ago, and when the bear market hit in 1990 and the S&P 500 slipped 3.2%, they dropped 15.4%. Recently, REITs have become extremely popular, because they have outperformed the S&P 500 for six straight years, and posted significant gains between the bear market of 2000-2002.  But analysts expect those gains are gone, and REITs will be more in line with the market going forward. In other words, anyone who hopes to win big with REITs may have already missed out.

"The diversification benefits of all these things have been oversold," said William Bernstein, aninvestment adviser in North Bend, Ore.

As in life, variety is good, but should be in moderation, he said.

"It might seem like there's never a bad time to diversify," he said. "But if you're buying into an asset class that has recently performed well, you're probably getting in at the wrong time."

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