A Case of Risk to Reward: Air Miles Vs Cashback
I am moving to a new place in September so my wife and I went furniture shopping recently. After selecting a few pieces, we were quite happy with our choices and proceeded to the cashier.
But at the cashier, we were struck by a dilemma. The furniture store has an ongoing promotion which gave all customers two options.
For all purchases above $1000, you could either choose:
1. Rebate in the form of Air Miles which would add up to about 4% discount on the overall price, or;
2. Rebate in the form of Cashback which would add up to 2% discount on the overall price.
At first glance, one would choose the Air Miles straight away as the discount amount is TWICE AS MUCH!
However, I paused for a moment.
“How should I approach this?”
Air Miles
Air Miles definitely provided more bang for the buck.
Cons: What is my downside?
However with the current COVID situation, it remained unknown when will air travel resume. Furthermore Air Miles could only be used to redeem flights (lack of options).
In the future, it is likely that air travel will be more expensive as fewer people are allowed per flight.
Will my air miles be worth as much? Or will every flight requires more air miles?
There were too many uncertainties surrounding air miles despite it being a better rebate.
The downside risk is simply unknown, potentially 100%. What if the airline goes bankrupt or choose not to honor the miles due to COVID?
Pros: What is my upside?
Will my air miles be more valuable in the future? Unlikely.
Will my air miles bring any returns more than 4%? Unlikely.
Cashback
Cash is…. Cash.
Cons: What is my downside?
It is a lesser rebate.
Pros: What is my upside?
I receive it IMMEDIATELY which I can choose to buy other items or simply invest it (full of options!).
However, it is also unlikely the 2% will provide more return on its own.
What Did I Do?
By now, you would have observed that in either case, my upside is limited (either 2 or 4%).
However, the downside of the air miles (potentially 1% or 0%?) significantly outweigh the downside of cashback (2%).
In any form of investment, if the return is similar, ALWAYS go for the safer option with limited downside risk.
For example, when investing for a fixed dividend return. If all the dividend companies provide similar returns of 4-5% annually, it would be wise to diversify your investments as much as possible.
This is because the more you diversify, the safer are your returns.
It is easy for one company to fail but hard for a dozen company to fail together
In addition, by concentrating your investment in 1 or 2 companies, it DOES NOT INCREASE your dividend payout beyond 4-5%.
Oh yes, before I forget, I chose the Cashback.
In the next post, I will talk about when it MAKES SENSE to concentrate your investment.
