Why points and miles are a bad long-term investment
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Editor’s note: This is a recurring post, regularly updated with new information.
It can be easy to slip into the mindset of thinking of your points and miles as simply being another type of money. The similarities are overwhelming — we get some of our favorite points from the same banks where we deposit our paychecks, and we use language like “currency” to describe different kinds of points and miles.
However, there’s one very important distinction that needs to be near the front of your mind: Unlike most true currencies, which have the potential for appreciation if invested well, your points and miles are guaranteed to lose value in the long run, and there’s nothing you can do to stop it.
Award travel isn’t a contest; there’s no prize for having the most points. Instead, it’s a game that’s best played as much or as little as needed to satisfy your own personal travel needs. In this post, I’ll explain why routinely carrying large balances of points and miles — with no plan to use them — is a bad investment strategy so you can avoid setting yourself up for disappointment, heartache and a possible loss in net (loyalty) worth.
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In the last few years, we’ve seen a number of painful devaluations of some of our favorite points programs. This has even hit transferable point programs. The general mantra is that transferable points such as Chase Ultimate Rewards are slightly more insulated from devaluations than an individual frequent flyer program is. Even if one of Chase’s partners is devalued, plenty of other options will remain.
However, Chase dropped Korean Air as a transfer partner roughly three years ago. At only 80,000 SKYPASS miles each way, Korean Air SKYPASS was one of the cheapest ways to book first class awards between the U.S. and Asia, and availability on the carrier’s A380s and 747-8s is often excellent. Removing this easy pathway to luxurious, first-class flights was a big hit to the Ultimate Rewards suite of transfer partners.
Then in April 2019, United MileagePlus — one of Chase’s strongest transfer partners — announced a switch to dynamic award pricing. This devaluation had two worrisome effects: Prices skyrocketed on a number of routes (especially during peak travel times and for long-haul premium cabin awards), and the decrease in saver level award space made it harder to book United awards through partner programs such as Aeroplan and Avianca. This caused TPG to drop his valuation of both Chase Ultimate Rewards points and United MileagePlus miles:
- Ultimate Rewards dropped from 2.1 cents each to 2 cents, a -4.8% change
- United miles dropped from 1.4 cents each to 1.3 cents, a -7.1% change
Devaluations happen so often that it can be easy to forget just how many we experience in this hobby. While some are worse than others, here’s a brief overview of some of the other major changes that have happened in the last few years.
Bad timing by United
At the end of April 2020, while most of the world was distracted by the rapid spread of the coronavirus pandemic, United quietly pulled its award chart for partner flights and raised prices across the board by 10%. Now, a one-way business class award from the U.S. to Europe on Star Alliance partners costs an extra 7,000 miles or $91 based on TPG’s valuations.
Singapore Suites Get More Exclusive
While Singapore Airlines has made some positive changes to its KrisFlyer program, it also devalued its own award chart and its Star Alliance partner award chart just a few weeks apart from each other at the beginning of 2019. Prices for premium cabin awards on Singapore flights generally went up by 10-15% which is manageable, but it certainly stings.
Hyatt Points + Cash
Although Hyatt is addressing concerns about its small footprint by expanding its partnership with Small Luxury Hotels of the World and beginning its integration of Two Roads Hospitality brands, it also devalued its popular Points + Cash booking option at the end of 2018. While the number of points required to book this way stayed the same, the cash surcharge is now equal to 50% of the standard room rate as opposed to being a fixed amount based on the category of the hotel.
Marriott Introduces Category 8 Pricing + Peak/Off-Peak Rates
The good news about this change is that we saw it coming from day one and had plenty of time to prepare, but in 2019, Marriott finally introduced Category 8 pricing, bumping its top hotels to 85,000 points per night (those same properties had been just 60,000 points per night since the August 2018 integration).
For some all-suite properties such as the St. Regis Maldives, this is still cheaper than they’d been before, but many legacy Marriott properties shot up in price. This was followed later in 2019 by the introduction of peak and off-peak award pricing, sending the maximum rate for a standard room at a Category 8 hotel up to a whopping 100,000 points per night.
We’ve also seen devaluations from Lufthansa, JetBlue, British Airways, Wyndham Rewards and IHG Rewards, to name just a few. The list goes on and on, and the only thing that we know for sure is that devaluations will be an ever-present part of award travel.
It’s one thing to save up points for a specific redemption, as you can frequently get a better value redeeming your points for long-haul premium cabin flights than you can for economy tickets. But your goal should be to earn and redeem as quickly as possible — otherwise, you expose yourself to the risk of devaluations.
What About Cash?
Even if you’re collecting rewards from a fixed value card like the Capital One Venture Rewards Credit Card (and opting for fixed-value redemptions instead of transferring your miles), your rewards still lose value as time goes on. The U.S. Bureau of Labor Statistics estimated the inflation rate for 2019 at 2.3%, meaning for every $1,000 in fixed value rewards you had saved up at the beginning of the year, you can only buy $977 worth of travel today. That might not seem so bad, but assuming a constant 2.3% rate of inflation, letting those rewards sit untouched for five years will drop their purchasing power to $890.17, an ~11% drop in value.
What if you’d opted for cash from the beginning? We like to think of our travel rewards as free, but every time you swipe a rewards card instead of a cash back one you’re sacrificing money for miles. This creates an opportunity cost, which we can peg at roughly 2% per $1 spent thanks to cards like the Citi® Double Cash Card, which offers 2% cash back on all purchases (1% when you buy and 1% as you pay).
If you’d chosen to earn cash back instead of points, you could have invested that money for growth instead of watching the value of your rewards erode over time. Whether you opt for a fixed-value investment such as a CD or a bond or pursue something riskier (but potentially more rewarding) like stocks or real estate, you should strongly consider earning rewards that have the potential to grow for you over time — if you aren’t planning to spend them immediately.
What to Do to Protect Yourself
My first suggestion is to redeem your points regularly and not let your balances creep too high. If you find yourself with hundreds of thousands of points but no trips on the calendar, figure out when your next vacation time is and start planning!
If you’re one of those people in the enviable position of earning more points than you can spend (thanks to limited-time offers or a large number of reimbursable expenses), consider sharing your wealth with friends or family members. As a last resort, consider switching to a cash-back card. There can be such a thing as too many points and miles if you can’t spend them fast enough. If you know you can quickly replenish your loyalty accounts, earning cash in the interim is not a bad decision at all.
The other great form of protection involves diversification. While I started out by lamenting the devaluations of some of Chase’s best transfer partners, the truth is that transferable points currencies are still the best form of protection available.
Even if half of an issuer’s transfer partners devalued their award charts tomorrow, you’d still have the remaining programs with which to redeem your points for a decent value. Compare that to someone who’d only been collecting miles with United. They were much more exposed to the impact of dynamic pricing, and there’s not much they can do about that now.
Raise your hand if you watched TPG’s vlog and were a little surprised to hear how many points he has in his Amex account. I’m not going to spoil the fun, but the number was much lower than I’m sure many people were expecting.
That’s because Brian Kelly lives by the “earn and burn” philosophy, and here at TPG, we’re always on the lookout for how we can spend those points to review exciting new products for you or to book a fantastic trip. If you haven’t already, take a look at the points you have right now and make sure you have a plan to use them before the next wave of inevitable devaluations strikes.
Featured photo by @chibelek via Twenty20
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