NEW YORK (Money Magazine) -- After the stock market bubble burst in 2000, millions of Americans turned tail on Wall Street and sought riches in real estate.

Spurred by record-low interest rates and never-say-no lenders, Warren Buffett wannabes refashioned themselves as budding Donald Trumps, snapping up investment properties and treating their own homes not as shelters but as the key to their retirement.

Purchases of investment homes set a record in 2005, according to the National Association of Realtors, and home improvement spending on single-family units jumped 66 percent over four years.

"Since the stock market bubble burst, equity mutual funds have attracted a fraction of what was going in during the early 1990s," says John Norris, chief economist with Morgan Asset Management in Birmingham. "It's fair to intuit that much of that money went into housing."

But now real estate is entering what looks like a bear market, with more and more once hot locales turning cold. The sure thing no longer seems so sure.

So what to do? First, if you've got a house you like, a mortgage you can handle, no plans to move and a stock and bond portfolio that's in decent shape, do nothing. Just recognize that despite the past five years, stocks are probably a better path to wealth than real estate for the foreseeable future.

Not only has the S&P 500 beaten the rise in housing prices over the past 20 years, but - face it - real estate is a hassle to invest in. "If you put $500 or $50,000 in a mutual fund, you're not going to get a bill for a huge property tax increase," says Owen Hill, a certified financial planner in Incline Village, Nev. "You're not going to have to replace a roof."

And if you're kicking yourself for buying at a market peak, again, don't sweat it as long as you've got time. "If your grandfather picked up a vacation home and overpaid by 40 percent, held it for two decades and gave it to his grandkids, how do you think he did?" asks Barry Ritholtz, a market strategist in New York City. Answer: just fine.

Benign neglect, however, isn't the right move for everyone. If the boom made you a millionaire or a several-hundred-thousandaire on paper but all your wealth is in your home, start thinking about a different strategy.

Having your money in one asset, whether it's real estate, tech stocks or heirloom wine bottles, may juice your returns for a while, but it leaves you vulnerable to catastrophic loss.

One option: If you don't really need so much room, get small. "A three- or four-bedroom home that baby boomers raised a family in is now probably worth a mint," says Stacy Francis, a financial planner in New York City. She suggests trading down to cut expenses and to free up cash for investing. You don't want to end up owing mortgage payments on a McMansion too late in life, she says, lest you be forced to spend your golden years working beneath the Golden Arches.

Of course, moving isn't always an option. If you're house-rich but other-asset-poor, Francis says, tilt investments more toward bonds than you otherwise might.

Bonds will act as a bit of a hedge: If the economy slows down, taking down the value of your house even further, bond prices will rise. They'll also produce more consistent returns and income for your mortgage payments than stocks will.

Avoid long-term bond funds and stick with ones that focus on shorter maturities. They're actually paying higher rates these days, and they're less volatile. Two top choices: FPA New Income (FPNIX) and Harbor Bond (HABDX).

Because of rising short-term interest rates, Yale economics professor Robert Shiller - who warned about a housing bubble two years ago - favors money-market funds. "Given the relatively pricey stock market and real estate markets, those investments look less attractive," he says. "People today should not think of money-market funds as temporary parking places. Now they can serve as real investments for your portfolio."

You can get more aggressive about hedging by investing in options. The Chicago Mercantile Exchange lists futures contracts tied to 10 of the nation's biggest markets. You can buy a "put" option for your area, which could make you money if home prices fall.

"It's akin to homeowners insurance," says Fritz Siebel, director of housing derivatives at Tradition Financial Services, an institutional brokerage. But Siebel cautions that to hedge effectively, you'll need to put up 4 percent to 5 percent of your home's value. And since the futures market is already expecting prices to drop (7.3 percent in Boston, for example, by next fall), the put will pay off for you only if the declines are precipitous. Otherwise, you will lose what you spent on the option.

Maybe you bought a condo late in the boom hoping to resell it for a quick profit, but now find you can't even get visitors to an open house.

Ask yourself: Am I up to being a landlord? Owning with a long-term objective of producing good rental income isn't a bad strategy, suggests Bill Carter, a financial planner in Dallas. "Even though real estate values may go down, that should have no impact if you have no need to sell for a while." But if you can't imagine yourself answering late-night calls about clogged toilets, your choices come down to holding your property vacant or selling.

If you're in an area that never got bubbly during the boom, don't rush to sell. If you're in over your head, however, or wading in a once frothy market like Miami, you'll have to make the tough choice of taking a small loss now instead of risking a larger one later.

Jim Ludwick, a financial planner in Odenton, Md., says a client who had to sell a suburban D.C. condo started with an asking price that made it the second most expensive of 15 on the local market. She sold it only after cutting the price to make it the second cheapest. The lower take may have been disappointing, says Ludwick, "but there are still 13 other condos that haven't sold.

Flipping condos is definitely out, but there are sensible ways to invest in property within a diversified portfolio. Consider real estate investment trusts, or REITs,which are the stocks of companies that own and manage property.

These funds tend not to move in the same direction as stocks, so they're good diversifiers, and they pay out high yields too.

Kim Dignum of Summit Financial Partners in Fort Worth suggests people allocate between 5 percent and 15 percent of their portfolio, exclusive of their home, to real estate. She likes international REITs now because valuations are lower overseas than in the United States.

Her pick: the Cohen &Steers International Realty Fund (Charts). Kate Warne, market strategist at Edward Jones, also thinks REITs are a good choice. Given the deflating residential market, she prefers commercial property REITs such as Kimco Realty (Charts), which primarily owns shopping centers, and Duke Realty (Charts), which owns and manages office buildings.

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