Should I buy lithium stocks for my portfolio?

Jon Smith runs through a few lithium stocks he could buy for his portfolio and tries to measure up the risk and reward potential.

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Lithium stocks have been growing in popularity over the past year. When I look at the price performance of lithium, this isn’t surprising. However, just like the price of gold versus the performance of gold mining stocks, the correlation isn’t always perfect. Therefore, as I’m considering whether or not to buy lithium stocks, I need to consider a few key points.

Different types of lithium stocks

When thinking about adding shares from this sector to my portfolio, I might find that I already have some exposure. For example, if I owned shares of Tesla or NIO, then I already do have lithium exposure. This is because these electric vehicle manufacturers have supply deals to obtain lithium as part of their car batteries.

Personally, I don’t own either stock, but it’s an example that highlights the point. The wide uses of lithium mean that I might be already be benefiting from investor interest via existing portfolio holdings.

In the purest form, lithium mining stocks should correlate best to the rising demand for the element. However, these also present a higher risk for me, as many are in exploration phases, or are at sites that aren’t currently at full operating potential. Yet the rewards could be large over the course of this year and beyond. After all, since the end of August, the lithium price has risen five-fold. It’s clear that demand is there for companies that can take advantage quickly.

Managing the risk levels

As alluded to above, I want to get exposure to lithium stocks but I don’t want to take on high levels of risk. One way I can do this is if I buy a conventional mining stock that also has exposure to lithium.

Rio Tinto is a good example here. It recently ran into problems in Serbia around the Jadar lithium project. This would have been one of the largest sites in the world, but the permits have been revoked (as it currently stands) after heavy protests. However, it does highlight the desire of the company to expand its presence into this area. This was further backed up in the recent Q1 report. It confirmed the completion of the acquisition of the Rincon lithium project for $825m.

Given that Rio Tinto has a diversified range of projects in the commodity space, it’s not completely reliant on lithium exploding further. I think this makes it a good lithium stock to add to my portfolio.

Lithium as a future star

I don’t think that there’s any doubt that lithium is going to be crucial for the world economy over the next decade. Therefore, I do want to add such stocks to my portfolio. Yet before I do this, I want to check that I don’t already have enough indirect exposure from my current holdings. Secondly, I want to limit my risk on some small-cap lithium miners, so would buy more diversified options to reduce this risk.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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