The best mining stocks are steady, profitable, and involve well-financed companies.

You should always resist the temptation to load up on mining stocks, no matter how attractive they appear. If the market goes into a downturn, these stocks could suffer more than average.

However, we do have recommendations for putting the best mining stocks in your portfolio, and we share these tips below.

1. The best mining stocks have steady production

Some of the most highly promoted mining stocks, including gold mining stocks, are penny stocks that have yet to produce an ounce of gold or of any other minerals. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas that have production from existing mines nearby, are far from certain.

2. The best mining stocks have long-lasting reserves

When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.

3. The best mining stocks have a reasonable market cap

We look at the market cap of energy mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. We like a mining stock’s market cap to be no more than half the value of the mine. We assume that the company will be able to expand its reserves after the mine opens, but if the reserves are double the mining stock’s market cap, it provides a margin of safety.

4. Mining stocks or ETFs are the way to go if you want to invest in gold or silver

If you want to invest in gold or silver, we think the best way to do it is through mining stocks or ETFs. We recommend staying away from gold or silver bullion, certificates representing an interest in bullion, and other gold or silver bullion alternatives, such as so-called “junk gold/silver” coins (these are common coins with no numismatic value that trade strictly on their gold or silver content).

5. Buy the best mining stocks for gold exposure—stay away from futures

Rising gold prices can make trading gold futures look more attractive. However, you can only profit in future-linked deals by out-guessing other futures traders by a wide enough margin to cover commissions and other trading costs. When you dabble in commodity futures, you are betting against professionals who have made studying these markets a full-time occupation, have better access to information than you do, and pay much lower commissions.

Most futures traders start out with a planned limit on how much they are willing to lose before they quit. In six months or so, most lose that amount, and quit trading. What’s more, because futures traders tend to trade often, a surprisingly large number find that the total brokerage commissions they pay during their trading career is close to the total losses on their commodity investments.

Buy the best mining stocks –- but diversify as well throughout the five sectors

We recommend that investors diversify their portfolio across most if not all of the five major sectors, including Resources. However, note that some markets are inherently unpredictable, especially energy and mines.

The markets for fungible goods like oil, interest rates and gold are especially unpredictable.

Markets like these are so enormous that there is no practical limit to how much you can trade in them. It follows that if you could predict them, you could wind up acquiring a measurable proportion of all the money in the world, and nobody ever does that. That’s why it’s a mistake to build your portfolio in such a way that you are forced to accurately predict the future direction of fungible goods like oil, interest rates or gold.

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices (including energy) rise, but in that case, your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

Have you owned mining stocks that ran into political trouble or environmental protests? Do you still own those stocks?

If you wanted to convince a skeptical friend that mining stocks are worth the risk, what’s the first thing you’d say?