Beginner’s Guide to Passive Income(Finale): How Can You Do It?

Continuing from the last post, we discussed how to start building your own passive income system. Now, let’s summarize how to proceed.

If you are completely unwilling to accept any capital loss, you can avoid all other strategies and stick to things like government bonds and GICs (Guaranteed Investment Certificates). These options are risk-free and hassle-free, offering a peaceful experience.

If you have the ability and are willing to accept a certain level of capital loss in exchange for potentnailly higher returns and more options, and if you have spare money that won’t affect your life or mood, then you can certainly try building some passive income to pursue your dreams and freedom.

To get started, first ensure your basic life needs are taken care of. Once your living situation is stable, calculate your yearly living costs. Based on that, determine the target amount of passive income and the timeline required to reach it. For example, my own strategies are in the range of 10%-30% annual returns, so I use this range to estimate my goals. You can adjust the parameters based on your own situation.

Once you have your passive income target, timeline, and acceptable loss threshold, you can begin experimenting.

Step 1: Choose Major Asset Categories

The most common asset categories are those I mentioned in this series, such as litigation financing, private credit, entertainment financing, collectibles, and private equity/pre-IPO investments.

Step 2: Evaluate Each Category’s Risk, Terms, Returns, and Entrypoints

Based on the risk, returns, terms, and entry requirements for each asset category, filter out the less cost-effective options and narrow down the ones you are willing to try. These details about risk, returns, terms, and entry points have been discussed in this series and you can refer back to them constantly to make decisions suitable for youself.

Step 3: Filter Out Specific strategies for Experimentation

Once you’ve chosen a broad asset category, you can begin selecting specific strategies to try. For instance, if you want to test platforms, you can start with those I listed at the end of XXX. If you want to follow my approach, you can refer to the specific details of each strategy that I wrote in my previous series and reach out to us to get more information.

In this stage, use the evaluation principles mentioned in the series earlier. For asset categories, it’s ideal to choose niches with very little competition, Alpha returns, short terms, low entry points, and truly passive. For specific strategies, consider how to minimize the risk of a scam on the part of the operators: evaluate their track record, performance, and behavior of the operators, and anticipate whether a scam would be worth it for them. Adjust your positions accordingly. Additionally, consider the risk of the asset itself—these details are already shared in my various strategy series as well.

Step 4: Decide on Total Allocation

Total allocation refers to how much you want to invest in passive income and alternative assets. As mentioned before, mainstream typically allocates between 10%-35%. This decision should be made based on your passive income target and timeline.

Step 5: Decide on Allocation Within Each Strategy

Once you’ve decided the overall allocation to passive income and alternative assets, it’s time to decide how to break it down across individual strategies. Key principles here include:

• The proportion of cash-flow-generating strategies
• Time horizon
• Diversification

Specifically, determine what portion of your strategies will generate short-term cash flow, how to diversify with small-scale tests, and how to adjust allocations based on results over time.

Summary of My Own Approach and Case Study

Based on the steps above, here’s my own process:

Step 1 & 2: Asset Categories
I decided on litigation financing, private credit, entertainment financing, collectibles, and private equity/pre-IPO, and I use this to further filter specific strategies within each category.

Step 3: Specific Strategies
Based on the risk, return, terms, and entry points, I focus on strategies like Legal Lending, Patent Litigation, Film Bridge Loans, Independent Films, Radio Dramas, Wine, Cars, and Angel/Pre-IPO investments. This list may change over time as I continue to refine my approach.

Step 4: Overall Allocation
Due to my interests and background, I have heavily invested in passive income and alternative assets, making up over 50% of my portfolio.

Step 5: Detailed Allocation
Since I prefer a passive income lifestyle, I’ve heavily allocated 80% to passive income-generating strategies. Initially, I tested many small-scale options, and as time went on, I narrowed them down. My current allocation is 60% in legal lending, 20% in patent litigation, and 20% in other strategies. This allocation may adjust every year based on performance—reducing positions in losers and increasing positions in winners.

Having observed the market over time, I truly believe that blue ocean strategies, those unrelated to market cycles, with short terms, high liquidity, and easily accessible operators, often provide 30%+ returns. There are so many opportunities that it’s difficult to test them all. This is both the worst and the best of times.

However, building a passive income system and lifestyle that suits you requires time, patience, and a certain risk tolerance. I always say that the core of the art of investing is not investing itself, but the ability to keep earning outside investing. Only with this ability can you afford to diversify, experiment, iterate, and refine, until time reveals the results of your tests, helping you gradually eliminate the wrong strategies and find the right ones.

I wish everyone the best on this journey of replacing active income with passive income, enjoying the scenery along the way, and finally arriving at a place where you no longer have to worry about your finances.