Why Points and Miles are a Bad Long-Term Investment
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I often preach the importance of earning and burning travel rewards rather than hoarding them. Today, TPG Contributor Richard Kerr uses some historical data to demonstrate exactly why you should heed that advice.
Once you’re in this hobby for a few years, you may find yourself in the midst of what I call a ‘brag fest.’ Whether you’re in the airport lounge, on a flight, or at a points and miles meet up (commonly called a DO), you might overhear people comparing their loyalty accounts to see who has the highest balance. If the conversation shifts my way, I’m always happy to disappoint them by admitting that I only have enough miles for the near future, and there are no 7-digit figures (or anything close) in my accounts.
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 worth.
The strongest argument against hoarding points is that loyalty programs have full discretion to slice the value of your account balance as they see fit. We’ve seen program after program devalue in the last few years, sometimes without warning. Here’s a recap of some recent devaluations:
Hilton HHonors — Hilton gave loyalists a tough pill to swallow in 2013. The hotel chain completely overhauled its award chart, going from 7 to 10 hotel categories and increasing the most expensive award nights from 50,000 to 95,000 points. The seasonal pricing and overlapping award chart categories still make no sense to me. In my opinion, this has been the most damaging devaluation of the last 3 years, partly because Hilton provided only a month and a half of lead time between announcing the changes and implementing them. I would guess I’m one of many who no longer actively collects HHonors points.
Club Carlson Rewards — Last month we said goodbye to the bonus award night which made the Club Carlson Premier Rewards Visa Signature (and other co-branded cards) so valuable. Carlson also recently restructured its award chart, initiating a generally unfavorable shift of popular hotels toward higher categories. While some may argue that the bonus night benefit was too valuable to be sustainable, making both changes simultaneously was overkill, and left many members disinterested in the program moving forward. Club Carlson gave two months of lead time prior to eliminating the bonus night, and just over one month before adjusting hotel categories.
Hyatt Gold Passport — Points and miles hobbyists collectively had their hearts skip a beat when Hyatt announced in November of 2013 that it would alter its award chart. The devaluation turned out to be small, allowing Hyatt to keep its place as the most valuable points for free hotel nights. Hyatt gave two months of lead time between the when the announcement was made and when the award chart was updated.
United MileagePlus — In November of 2013, United announced (with three months of lead time) a significant increase in the cost of many award flights, particularly those booked in premium cabins on Star Alliance partners. Last summer United announced the transition to revenue-based earning (with about six months of lead time). In essence, United made free flights harder to reach on both the earning and redeeming side.
Southwest Rapid Rewards — In September of 2013, Southwest increased the number of points needed for Wanna Get Away fares from 60 to 70 per dollar in airfare (a decrease from 1.7 cents to 1.4 cents in value per point). In April of this year, Southwest went one step further and decoupled its points from a fixed value. As it turns out, points have increased in value in some cases, though you have to calculate the value of each redemption to find out where you stand. This change wasn’t a clear devaluation in the traditional sense, but it did erode some of the trust Southwest loyalists had in the Rapid Rewards program.
British Airways Avios — In April of this year, British Airways increased awards in premium economy, business, and first class by as much as fifty percent. Avios are already a difficult sell for use on many award flights due to high carrier-imposed surcharges. Fortunately, the higher award prices mostly targeted long-haul flights, and the program’s valuable short-haul awards were left unchanged. British Airways gave four months of lead time between the announcement and when the changes were implemented.
An interesting way to visualize the changing value of points and miles is to compare the performance of travel rewards to that of the stock market. According to Morningstar.com, the average U.S. Equity fund has a total return of 16.92% over the last three years. Using TPG’s monthly valuation series, I looked at the difference in value of popular loyalty currencies from when TPG first started the series in 2013 to the most recent iteration for July of 2015. While these numbers are more subjective than stock market results, they give you a general sense of how points and miles perform in the long run.
|Program||2013 Value (cents)||July 2015 Value (cents)||% Increase/Decrease|
|American Express Membership Rewards||1.9||2.0||5.3%|
|Barclaycard Arrival Miles||0.5-1.1||0.5-1.1||0.0%|
|Chase Ultimate Rewards||2.2||2.1||-4.6%|
Assuming you were equally invested in these various loyalty currencies (which you might be if you follow TPG’s advice and diversify your rewards), then the value of your award travel portfolio would have declined by over five percent. Your results could have been much worse if you were mostly invested in, for example, Hyatt, United, and Chase Ultimate Rewards.
Even with fixed value rewards that haven’t changed (such as Capital One Venture Rewards), it’s important to remember that there’s an overall depreciation due to the fact that your points have not kept up with inflation. According to the consumer price index published by the US Bureau of Labor Statistics, average inflation for the last 3 years has been 0.7%. Since your fixed value points have grown at 0%, you’ve lost a little over 2% of their value by not redeeming them sooner.
As I discussed above, loyalty programs don’t always provide much warning before instituting negative changes. However, it’s important to keep up with the latest news to catch wind of potential devaluations, as you may see the writing on the wall that indicates a change before any formal announcement is made. The better informed you are, the more easily you can adjust your earning strategy and begin planning an exit. With that in mind, here are a few potential devaluations I think we may see in the near future:
1. American Airlines AAdvantage — With the US Airways merger creating more AAdvantage millionaires, the sign-up bonus for the Citi / AAdvantage Executive World Elite Mastercard, dwindling award space, and low prices for transoceanic award flights, I feel something has to give soon. American already had some surprise policy changes last year, and I wouldn’t be surprised if more are coming. A complete overhaul of the award chart may be in the works.
2. Southwest Companion Pass — Devaluations can affect particular aspects of a program aside from the award charts themselves. The Companion Pass, which can be earned almost entirely from credit card sign-up bonuses, is perhaps too valuable in its current form. Allowing passengers an easy way to get free companion tickets doesn’t seem sustainable, and I wouldn’t be surprised to see it go the way of Club Carlson’s bonus award night.
3. Citi Prestige 4th Night Free Benefit — Citi has done a great job improving the ThankYou Rewards program as well as the associated credit cards, in particular the Citi Prestige. You can get your fourth night free at any hotel when you book via Citi’s designated travel provider, and that benefit alone can easily be worth more than the $450 annual fee. With that kind of value, it seems too good to last.
4. Hyatt Diamond Suite Upgrades — No, I don’t anticipate the death of these useful certificates. However, I do foresee losing the ability to use them on Points + Cash stays. Paying 10,000 points + $125 for a suite that normally goes for $2,000 per night is just too good of a deal.
My objective in bringing up these potential devaluation scenarios isn’t to frighten you into burning all your points and miles immediately, or to discourage you from getting into award travel in the first place. I’m just trying to illustrate that travel rewards are to be used, not admired.
What Should You Do?
I hope I’ve convinced you so far that hoarding points and miles is a bad long-term strategy; however, I do have one exception to my rule. As with cash investing, I have an emergency fund of miles that I don’t touch unless a truly urgent situation arises. This came in handy when my wife had to get home to be with her father before an emergency heart surgery, and we weren’t left having to buy a last-minute ticket from Tokyo to Atlanta. Choose whichever program you think can meet your needs in a likely emergency, and keep a small stockpile there just in case. My rule is to acquire enough miles for what an award ticket currently costs, plus another 25% in case of a devaluation.
The key to overcoming devaluations is to always have a plan. When I teach Travel Hacking 101 courses or write about strategies for earning points and miles, I always try to remind my audience that you should have a specific travel goal in mind. Whether you’re taking advantage of a top credit card offer or just filling up your gas tank, do it with purpose. Ask yourself how the points you’re earning will help you achieve your upcoming travel goals for the next 6-12 months. This prevents them just sitting in your account, unused and ripe for devaluation.
How do you protect yourself against loyalty program devaluations?
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