Electric vehicle stocks expose investors to unique opportunities—but with risks to match. Here’s a look as well at lithium stocks and “theme” stocks in general.

The reality of electric vehicle stocks is that it may take years or decades before the market for electric cars moves beyond a niche segment where buyers are willing to overlook cost and performance limitations—and this already-small pool of buyers could shrink if government support for plug-in cars is cut back or ends altogether.

In the meantime, electric-car owners have to plan their long drives carefully, to be sure they can get to a recharging station before the battery runs out. For many buyers, an all-electric car can only serve as a second car, solely for in-town use. And when you recharge an electric car, in many cases you’ll do so with electricity from coal-burning power plants, which defeats the purpose for many electric-car fans.

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Investing in firms that make gasoline-power cars as well as electric cars could be a better idea for growth than purely electric vehicle stocks

Still, if you want to invest in electric-car growth, we think you should avoid companies that are purely in that market, like Tesla (symbol TLSA on Nasdaq). Regardless of how fond you are of the concept, companies that produce electric vehicles exclusively face significant business obstacles, which expose their investors to significant investment risk.

If you want to invest in electric-car stocks, you’re better off with companies, like Ford, Toyota and Honda, that stand to profit from both electric and gasoline-powered vehicles. As electric vehicles become more common in the years and decades ahead, these companies can gradually shift their emphasis away from gas and toward electric.

Investing in electric vehicle stocks exposes you to many of the same risks as renewable energy investments

Renewable energy stocks have gained in popularity with investors over the past few years as concern over the environment has grown. However, many of these companies have limited investment appeal.

The main reason is that most renewable power production relies on new technology and it’s necessary in most cases to rely on government subsidies to attract investors. Removal of these subsidies would make most renewable energy stocks commercially unviable.

To cut your risk, we recommend that you focus on renewable energy stocks that already have a sound base of other operations.

Here’s a look at lithium mining stocks or rare-earth elements as an alternative to electric vehicle stocks

Lithium is used to make lithium-ion and lithium-metal batteries for electric and hybrid-electric cars.

Historically, lithium stocks have soared as investors start to believe that growing demand could lead to supply shortages. But you’ll need to look carefully at the fundamentals and prospects of each stock before investing. Despite its range of expanding uses, longer term, lithium could fall victim to the oversupply issues that so often plague commodities when producers rush to catch up with rising orders. Lithium deposits that were previously deemed uneconomic to mine could be accelerated into production and that would bring prices back down.

Rare-earth elements are used in a variety of modern devices and applications: catalytic converters and petroleum refining; magnets in small and large motors; and rechargeable batteries among other products. Demand remains strong for magnets from rare-earth metal. They’re used in motors for industrial robots as well as hybrid and electric vehicles. Electric vehicles require about 50% more rare-earth metals than gasoline-powered models.

Lithium or rare-earth mining companies worth looking at as investments will be well-financed mining stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best stocks all have sound balance sheets and reasonable debt.

Furthermore, we like a mining stock’s market cap to be no more than half the value of their reserves. We assume that the company will be able to expand its reserves with more exploration, but if the current reserves are double the mining stock’s market cap, it provides a margin of safety.

Note that resource and commodity stocks in general should make up only a limited portion of most investor portfolios.

Theme investing, including investing in electric vehicle stocks, can add to portfolio risk

As with most investment themes, we’ve always recommended that you choose stocks very carefully to profit. That’s because many of these companies have only limited investment appeal.

The appeal of “hot” themes, such as bitcoin, attracts naïve investors. They, in turn, bid up the prices you have to pay to invest.

Additionally, the excitement surrounding the theme attracts opportunists who simply want to create investments and business ventures that are easy to sell, regardless of their chance of long-term success. This cuts the average quality of available investments.

It’s hard to imagine a worse investment situation than buying a low-quality, over-priced stock because of its connection to an investing theme just when the popularity of that theme is about to evaporate.

Use our three-part Successful Investor philosophy when building a sound long-term portfolio:

1. Invest mainly in well-established, mostly dividend-paying companies
2. Spread your money out across most if not all of the five main economic sectors
3. Downplay or avoid stocks in the broker/media limelight

Risky assets and controversy have led to suspicion behind the value in electric vehicle investments. Do you think this sentiment will change for the better or will it continue to decline?

Do you have investments in the electric vehicle market? How stable are they?