Beginner’s Guide to Passive Income (2): Common Asset Class

In the broadest sense, passive income refers to any income you can earn without actively managing it or investing your time and effort. However, my focus is specifically on passive income from alternative assets.

Let’s first clarify what alternative assets are and why I choose to focus solely on passive income within this category (as opposed to the broader definition of passive income).

What Are Alternative Assets?
Put simply, alternative assets are those outside the realm of mainstream asset classes.

What are mainstream asset classes?
These include the usual suspects, such as stocks, bonds, and cash etc. Even within these categories, there are passive income strategies, such as dividend-paying stocks and options/arbitrage etc.

What about real estate?
Would you believe me if I told you that real estate is classified as an alternative asset? In the market, that’s precisely how it’s categorized! Yes, the real estate that everyone is so familiar with falls under the alternative asset category. But for my discussion, it’s not part of the focus.

Why not? Because the alternative assets I deal with must meet the following criteria:

Not mainstream or already well known
Popular options like dividend-paying stocks or real estate are not my focus. These are crowded markets, where competition is fierce, and finding quality assets is difficult. The intense competition erodes excess returns, making it hard to achieve meaningful gains. Assets like these, which are widely accessible yet require significant time and effort to manage without delivering superior returns, don’t align with the principles of passive income or the “blue ocean” strategy. I avoid them to prioritize opportunities for higher returns, which means the asset class I invest in must have alpha that’s relatively easy to obtain, which I’ll discuss later.

Truly passive income.
My longtime readers may recall a series I wrote debunking the myth that real estate is passive income. In reality, it’s more like taking on a full-time job without a salary—far from passive! True passive income means you sign off on a deal and continue to receive returns, no matter where you are in the world or what you’re doing. This principle is about achieving time and location freedom so you can enjoy the life you want sooner rather than later.

High liquidity
Many private equity or alternative asset investments have cycles of 5+ years, and real estate often takes 5–7 years. These long timeframes don’t work for me. Mainstream options, especially funds, typically follow this structure, so I avoid them. Instead, I focus on short-term cycles to enable quick adjustments based on results—whether to cut the losers or increase positions on winners.

Low barriers to entry.
Low entry thresholds allow for rapid, large-scale trial and error, helping filter out loss-making strategies while identifying sustainable, income-generating winners over time. This principle is about casting a wide net and using probabilities to weed out losers and find winners.

To sum up, I only focus on niche, blue-ocean opportunities with high excess returns, short timeframe, low entry point, and zero need for ongoing time or effort.

I know this may differ from the passive income definitions you’ve encountered elsewhere. But I prioritize practical results—what works in reality is what matters to me. My approach is rooted in hands-on experience and principles I’ve tested and refined over the past 10 years. If you disagree, that’s fine too!

Now, what are the common asset classes in passive income that meet these criteria? After years of filtering, here’s my list: