Income Gain and Capital Gain: What You Need to Know to Achieve FIRE

The goal of FIRE (Financial Independence, Retire Early) is to achieve financial independence early and live a free life not bound by work. To realize this, asset formation through investment is essential.

To live without relying on a company, you need to acquire the skills to invest funds efficiently and manage assets from a long-term perspective.

In this article, I will explain in detail "Income Gain" and "Capital Gain," which are indispensable for understanding the asset management required to achieve FIRE.

What are Income Gain and Capital Gain?

Returns obtained from investments are broadly divided into two types: "Income Gain" and "Capital Gain." I will briefly explain the characteristics of each.

Income Gain

Income gain refers to the continuous revenue obtained while holding an asset.

Because you can obtain stable income, it is suitable for long-term asset management.

Specifically, it includes the following:

1. Dividends:

In stock investment, a portion of the company's profits distributed to shareholders.

2. Interest Income:　　

Interest income obtained from bonds, bank deposits, etc.

3. Rental Income:

In real estate investment, rental income obtained by leasing a property.

(I touch upon the real estate rental business in the following article, so please refer to it.)

Building wealth solely as a company employee is difficult! How to increase your take-home pay in an era of inflation – Julius inc.

Capital Gain

Capital gain refers to the profit obtained by selling an asset.

Because capital gain has the potential to yield a large profit all at once, it is suitable for aiming at short-term asset growth.

Specifically, it includes the following:

1. Profit from the Sale of Stocks:

Profit obtained by selling stocks at a higher price than the purchase price.

2. Profit from the Sale of Real Estate:

Profit obtained by selling real estate at a higher price than the purchase price.

3. Profit from the Sale of Other Assets:

Profit obtained by selling other assets such as precious metals or artwork.

Weaknesses of Income Gain and Capital Gain

Investment always comes with risks, and the question is how the investor deals with them.

Whichever investment method you choose, weaknesses exist. First, let's understand where the weaknesses lie.

Here are the main ones.

Income Gain

1. Small Profits:

While income gain provides stable revenue, the profit obtained at one time is small compared to capital gain. For example, stock dividends and bond interest are relatively small amounts, requiring a substantial principal to gain significant profits.

2. Inflation Risk:

Because income gain is a fixed income, if inflation progresses, your actual purchasing power may decline. Especially in long-term investments, it is necessary to consider this risk.

3. Risk of Principal Loss:

For example, when investing in high-dividend stocks, there is a risk that the stock price will drop below your purchase price due to factors such as a deterioration in the company's performance.

Capital Gain

1. Risk of Large Losses:

Capital gain is a high-risk, high-return investment. If stock prices crash or a company goes bankrupt, the value of your invested assets can drop significantly.

2. Timing of Sale is Crucial:

To obtain a capital gain, you must sell the asset. As long as you don't sell, it remains an unrealized gain or unrealized loss. If you mistake the timing of the sale, you may not only fail to make a profit but also suffer a loss.

3. Lack of Stability:

While capital gain allows you to aim for large profits in a short period, it is difficult to obtain stable revenue over the long term.

Income Gain is the Key to Achieving FIRE

To achieve FIRE, securing a stable income source is mandatory. By obtaining stable income gains over the long term, you can cover your living expenses after early retirement.

In other words, it is appropriate to manage investment targets that yield income gains over the long term.

Main Investments Where Income Gain Can Be Expected

The main investment targets where income gain can be expected include the following.

I will also explain the merits of each.

• Real Estate Investment:

By renting out owned real estate and earning rental income, you can secure stable cash flow.

• High-Dividend Stocks:

To obtain stable income gains, investing in high-dividend stocks is also effective. By holding stocks of companies with high dividend yields, you can expect to earn regular income.

• ETFs (Exchange Traded Funds):

ETFs allow for diversified investment and have high liquidity because they can be traded on exchanges. If you invest in ETFs that emphasize dividends, you can obtain a stable income.

Why is Long-Term Management Necessary to Achieve FIRE?

Managing income gains over the long term to achieve FIRE serves the purpose of aiming for the compound interest effect and responding to market fluctuations.

• Compound Interest Effect:

By continuing to invest over the long term, you can maximize the power of compound interest. Compound interest is the effect where reinvesting the obtained profits causes the principal and profits to increase like a snowball. The more time passes, the larger this effect becomes.

• Responding to Market Fluctuations:

In the short term, market fluctuations can be severe, but in the long term, the market tends to grow. By managing over the long term, you become able to withstand temporary market declines.

Summary

In reality, in investing, you cannot completely separate aiming for income gain and aiming for capital gain.

In my case, I invest in real estate aiming for income gain, but there are times when I sell on a case-by-case basis.

Also, I sometimes use the cash obtained from real estate rental income to invest in high-dividend ETFs for long-term management purposes, earning periodic dividends while additionally holding unrealized gains (or unrealized losses, depending on the period).

To aim for a FIRE lifestyle that does not rely on a company, I want you to aim to build a portfolio that suits you after understanding the respective merits and demerits of income gain and capital gain. (Text by Julius)

About the Author Kenji Kamioka

CEO, Julius Inc. / FIRE Practitioner

Kenji Kamioka is a former IT executive who spent 30 years in the corporate world, with over 10 years working across Asia. His life changed when he read Rich Dad Poor Dad.
Realizing the trap of the "rat race," he started building assets in real estate and stocks while still working. It took him 10 years, but he successfully achieved Financial Freedom and graduated from the salaryman life.
He established his own asset management company to optimize tax efficiency and now dedicates his time to teaching others how to escape the corporate cage.
His advice is not theoretical but based on the gritty reality of achieving FIRE.

Credentials: AFP (Affiliated Financial Planner), Certified Real Estate Transaction Agent.

Book

❶『令和のサラリーマンの為のFIREのススメ』(Amazon電子書籍）

❷『FIRE Recommendation for Office Employee』(Amazon Kindle）