These Are the Next Hot Investments

As we pass the first anniversary of the market meltdown, many investors have started to get much more comfortable putting their money back into stocks. But investors are more excited about some parts of the market than others. Should you follow their lead and invest in these hot areas, or will latecomers to the market rally end up disappointed?

What the hot money's buying
According to The Wall Street Journal and fund tracking firm EPFR Global, last week saw one of the biggest moves into stocks all year. Money market mutual funds posted a weekly withdrawal figure that was the second-highest in all of 2009. Here's a short breakdown of where the money went:

Source: WSJ, EPFR Global.

These numbers paint a mixed picture about what's going on in the financial markets. On one hand, the figures appear to follow a familiar pattern, in which investors move money out of ultra-safe investments only after prices of riskier assets have already risen substantially.

Yet this time around, the situation doesn't look as dire as it often does. Although investors are leaving the safety of cash, they're putting a lot of money into fairly conservative investments like bonds. And although that comes with its own problems, it suggests that not everyone is jumping back into the stock market without reservation.

Grasping at straws
Judging from the stocks investors are buying, though, chasing performance is alive and well. Here are some examples of investments in each of the inflow-intensive categories listed above: 

Source: Morningstar. YTD = year to date.

At least on the stock side, investors appear to prefer the high-risk, high-reward prospects right now. With gold's rise to $1,000 per ounce, and other commodities performing even better, many stocks in the sector have seen dramatic rises during 2009. Meanwhile, given the relatively small size of emerging markets compared to the U.S. stock market, the relatively small difference in inflows shows just how attractive investors find the continuing growth that economies like China's are experiencing.

Perhaps even more astounding is the big bet that investors are making on real estate. Although residential real estate prices have recently seen their first monthly gains in years, investors seem to be ignoring concerns that the commercial property market may be the next to suffer from major economic problems. One major REIT index is up about 22% so far this year, with components that include both residential and commercial real estate investments.

The right move now
The first thing you should understand about these numbers is that they have an extremely short-term focus. Weekly fund flow data won't give you the best gauge of long-term investment trends, and what's happening in any given week can change dramatically the next. If you try to follow these trends, not only will you end up whipsawed from week to week, but you'll also find yourself getting in on every hot investing fad a little bit too late.

However, that doesn't mean that those investments are inherently bad. There's a place in your portfolio for all of the categories of investments listed above. A truly diversified portfolio might well include small portions of all of those categories, as well as others not listed there. And if you lack enough investments in a particular sector, then it might even make sense to buy even after prices have already risen.

However, you shouldn't count on trying to use this data to make a lot of money quickly. Although you might get lucky, you could easily fall prey to a downturn when it comes. If you want to be part of the smart money, learning not to chase recent performance is your first lesson toward a richer future.