Forum Mailbag: Perfect Credit Score, International Bond Fund, Roth 401k Versus IRA, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads and White Coat Investor. Here are some of the discussions happening around the internet.

1. White Coat Investor: Perfect Credit Score

Question: White.Beard.Doc recently checked his credit score, and to his surprise, he found out that he had a perfect credit score of 850. He was wondering whether this was related to the fact that he is currently deleveraging and reducing his mortgage debt.

WSP’s Take: The maximum credit score is 850. It turns out that quite a few people have perfect scores. Bloomberg recently reported that only 3 million of the 200 million with credit scores have a perfect 850 score.

While having a perfect credit score is pretty cool, it’s kind of like getting a 100% on a test when all you need to get the A is 90%. To mortgage lenders, an 850 credit score is treated the same as an 800 credit score. According to Zillow, an “excellent” credit score is 720, which would typically qualify you for the lowest mortgage rates.

There are many factors that go into calculating your credit score, such as your credit history length, frequency of missed payments, and credit line utilization. It’s hard to say what exactly will get you the perfect credit score, but White Beard Doc’s long history of paying down a mortgage without presumably missing a payment certainly helps.

2. Bogleheads: Adding International Bond Fund To Three-Fund Portfolio

Question: Catdude finally switched to a three-fund portfolio and was wondering whether it was worthwhile to add an international bond fund to his portfolio.

WSP’s Take: The core funds in a three-fund portfolio is a U.S. stock fund, a U.S. bond fund, and an international stock fund. It is not necessary to add any additional asset classes beyond these three.

If you were to add a fourth asset class, which one should you add? One option would be international bonds, which is what Vanguard does with their Target Retirement funds.

However, the asset allocation to international bonds in Vanguard’s Target Retirement funds is less than 5% for young investors. For example, the Target Retirement 2050 fund has 2.9% of its assets invested in an international bond fund. Is that meaningfully going to change your investment returns? Probably not.

For young investors, I favor the simplicity of a three-fund portfolio. If you don’t plan to invest more than 5% (or even 10%) of your portfolio in a particular asset class, it probably won’t make much of a difference in the long run. So instead of international bonds, some investors choose to add real estate as their fourth asset class.

3. White Coat Investor: Roth 401k versus Roth IRA

Question: FlermoenMD’s employer recently added a Roth option to its 401(k) plan. He was wondering whether he could contribute to both a Roth 401(k) and his Vanguard Roth IRA, and whether one account was preferable over the other.

WSP’s Take: Yes, you can contribute to both a Roth 401(k) and a Roth IRA. However, attending physicians may prefer to invest in a traditional 401(k) because they are in a high tax bracket and would get a large tax deduction by contributing to a traditional 401(k) while paying taxes at a lower tax bracket in retirement.

Most attending physicians would benefit by maximizing a traditional 401(k) and then also contributing to a backdoor Roth IRA. However, if you only had the money to invest in one account, then I would invest in a Roth IRA. There are several additional benefits of a Roth IRA, such as a step-up in basis at death and a wider range of investment options.

4. Bogleheads: Investing In A Bear Market

Question: Harri192 is a 30-year-old investor who currently invests in low-cost index funds. Given the rapid rise in the stock market over the past few years, he was wondering what are some reasonable investment options for a possible stock market correction. He describes various possible headwinds in the market including high stock market valuations and inflation fears.

WSP’s Take: Market timing has burned many investors over the past few years. People have been worried about an impending bear market for years, and this has caused some investors to head to the sidelines prematurely.

If you fear potentially losing half of your money in a bear market, then you should have an asset allocation with more bonds. But this should be done when assessing your risk tolerance and setting your asset allocation. You shouldn’t increase your allocation in bonds simply because you think the stock market is overvalued.

Wall Street Shares: 5 Articles To Read This Week

1. Passive Income MD: Spend Less or Earn More – Which is Better? — I think it depends on your specialty — you can modulate your income more easily in certain specialties (e.g. EM, anesthesia, hospitalists) which are shift-work jobs.
2. Dads, Dollars, Debts via Rogue Dad, MD: What I will teach my son about medicine — DDD comes from a family of doctors, and he describes how he portrays his profession to his son.
3. The Physician Philosopher: Five Causes of Burnout — TPP discusses the five most common causes of physician burnout.
4. Dr. Cory S. Fawcett: Will You Miss Medicine When You Retire? — Dr. Fawcett describes the first time after retirement that he missed being a surgeon.
5. Married & Harried via Physician on FIRE: The Actual Benefit of Front-Loading Your Investments is Smaller Than You’d Think — The benefits of front-loading is approximately equal to the market return multiplied by the additional time in the market.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?