Will 'green' stocks deliver the next dot-com frenzy - and another burst bubble?

My neighbor was palpably proud when he mentioned he had bought a specialized fund that invested in a solar energy company. When he asked what I thought, I had to play killjoy.

While I sense that climate change is probably a manmade problem that needs to be addressed by all of us, as investors we often pursue the wrong ideas. No doubt, there are dozens of ways to slice and dice the "green" sector. You can buy mutual funds that invest in broad alternative energy portfolios or narrow the field to only solar, water, or clean-tech companies.

There's more than $171 billion in more than 170 socially and environmentally screened vehicles, according to Morningstar Inc. So much money has been invested in these stocks and funds that analysts are concerned a bubble may be forming.

Solar-power stocks, for example, are hot. Yet will these companies go the way of ethanol-producing firms and fizzle?

One fear is that green stocks are morphing into the next dot-com frenzy. Everything is coming up roses for these companies: The world needs them, hydrocarbon-based energy prices are high, and there's no end in sight to their potential. Sound familiar?

You would only need to examine what happened to biofuels to get an idea of how investor exuberance ebbs and flows. Remember when corn-based ethanol was touted as the antidote to high oil prices? When a raft of scientists noted that it would provide an insignificant fraction of US fuel supplies, a new reality came to light. The biofuels frenzy has been further chastened by the fact it has contributed to high food prices.

One darling was Pacific Ethanol Inc.; it's down more than 70 percent this year. Is the thrill gone for other alternative-energy companies just as they are attracting worldwide investor attention?

It's not unusual for a small industry segment to be quite volatile. So why concentrate market risk in a handful of companies? Maybe major alternative-energy advances will come from the nanotechnology, biotechnology, or semiconductor industries. They may even come from major energy companies.

An alternative-energy or climate-change portfolio makes no sense if you are risk-averse. My advice to my neighbor was to avoid narrow sector funds. Place an across-the-board bet on the entire market and you may earn higher returns and cut your risk.

In that spirit, the best way to address climate change is the Vanguard Total World Stock Market ETF, which samples major global exchanges, or the iShares MSCI Emerging Markets Index ETF, which invests in developing economies. Few people crow about owning such index funds, which have about as much glamour as drywall. Yet when it comes to global-climate concerns, they may be the best way of investing in the widest possible array of companies without making guesses on which technologies will be profitable.

John F. Wasik is a Bloomberg News columnist.