One of my largest assets is about to take a hit, and there's nothing I can do about it. In January, my United Airlines (UAL) points will fall in value and I'll lose my elite status. Even if I kept it, it'd be worth less.
Reward points, it turns out, are a lousy investment. Airline and credit card companies constantly redefine how and when you can use your points, and point inflation is rampant—larger and more pervasive than dollar inflation. Credit cards regularly offer tens of thousands of points for signing up, leaving the 1,300 miles accrued on a New York-to-Florida flight practically worthless. As airlines consolidate, they also devalue what your points can buy. My United points have been hit particularly hard: According to estimates by Brian Kelly, aka the Points Guy, they are worth an estimated 1.5� a mile, down from 2� a mile two years ago. After nearly 20 years of reward-point hoarding and four years of cross-country commuting, I am rich in points but getting poorer by the minute.
If my points were cash, I'd invest them in stocks or inflation-linked Treasuries to fight inflation. If they were my apartment, I'd update my kitchen to maintain resale value. Is there really nothing I can do to protect the value of my points? I put this question to Mr. Kelly. He offered me the following three strategies:
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Stop hoarding. I've been squirreling away my points for years. Kelly told me to quit it. ”You have to feel good about using them,” he said. “They only go down over time, especially as airlines consolidate and offer fewer flights.”
Diversify. You want to be able to use points on the largest variety of goods possible, Kelly says. That means ditching airline credit cards, because their points can be used only for air travel on one carrier, in favor of credit cards whose the points can be used different ways cheaply: hotels, a choice of airlines, and entertainment. He estimates that Starwood (HOT) Preferred Guest points offer the most flexibility. He recently treated his father to a Knicks game in a luxury box at Madison Square Garden for just 45,000 Starwood points, normally worth between $9 to $30 per thousand.
Watch the exchange rate. Just because you can use your points on different goods doesn't mean you should. Different point-to-dollar exchange rates exist, depending on how you use your points. Points used for airfare are worth between 1.5� and 2� a point. If you use the points to buy food in Newark Airport, they are worth less than half that. Exchanging points for cash also yields a lower return. There are times when you still might want to buy a coffee with your points—particularly, Kelly says, if you are “point rich and cash poor.”
Talking to Mr. Kelly, I realized that just like investing in markets, a successful point risk strategy requires setting clear goals and time horizons. When I flew for work all the time, my sole objective was maintaining my elite status. The benefits were worth it: international upgrades, mileage bonuses, and a better flying experience, which matters when you spend half your life on planes. Now that I fly less, I should adjust my strategy and focus on spending rather than saving.