A Century of Lessons from the US Stock Market: Why We Should Chase Beta and Forget Alpha

Author: Nick Maggiulli , financial blogger & author of "Just Keep Buying"

Compiled by: Felix, PANews

In the investment community, it's widely believed that excess returns (Alpha), or the ability to outperform the market, are the goal investors should pursue. This is perfectly logical. All else being equal, more Alpha is always better.

However, having Alpha doesn't always guarantee a better return on investment. This is because your Alpha always depends on market performance. If the market performs poorly, Alpha may not necessarily generate profits for you.

For example, imagine two investors: Alex and Pat. Alex is a very good investor, consistently outperforming the market by 5% annually. Pat, on the other hand, is a poor investor, consistently underperforming the market by 5% annually. If Alex and Pat invest at the same time, Alex's annual return will always be 10% higher than Pat's.

But what if Pat and Alex started investing at different times? Is it possible that, despite Alex's superior skills, Pat's returns would actually exceed Alex's?

The answer is yes. In fact, if Alex had invested in US stocks between 1960 and 1980, and Pat had invested between 1980 and 2000, Pat's investment returns would have exceeded Alex's after 20 years. The following chart illustrates this:

In this scenario, Alex achieved an annual return of 6.9% (1.9% + 5%) from 1960 to 1980, while Pat achieved an annual return of 8% (13% – 5%) from 1980 to 2000. Although Pat's investment skills were inferior to Alex's, Pat outperformed Alex in terms of total returns adjusted for inflation.

But what if Alex's opponent was a real investor? Let's assume Alex's competitor is Pat, someone who consistently underperforms the market by 5% annually. In reality, however, Alex's true opponent would be an index investor whose annual returns are in line with the market average.

In this scenario, even if Alex outperformed the market by 10% every year from 1960 to 1980, he would still lag behind index investors from 1980 to 2000.

Although this is an extreme example (i.e., an outlier), you might be surprised to find that having alpha results in significantly higher frequency of underperformance relative to historical performance. See the chart below:

As you can see, when you have no alpha (0%), the probability of outperforming the market is essentially equivalent to flipping a coin (approximately 50%). However, while the compounding effect of alpha returns does reduce the frequency of underperforming the index, the increase is not as significant as one might imagine. For example, even with an annual alpha return of 3% over a 20-year period, there is still a 25% probability of underperforming an index fund in other periods of US market history.

Of course, some might argue that relative returns are the most important, but I personally disagree. Ask yourself, would you rather earn the market average return in normal times, or simply "lose a little less money" (i.e., earn positive alpha) than others during a recession? I would definitely choose exponential returns.

After all, in most cases, index returns deliver quite good returns. As the chart below shows, the real annualized return of US stocks fluctuates over ten-year periods, but is mostly positive (Note: Data for the 2020s only shows returns up to 2025):

All of this suggests that while investment skills are important, market performance is often more crucial. In other words, pray for Beta, not Alpha.

From a technical perspective, beta (β) measures the magnitude of an asset's return relative to market volatility. If a stock has a beta of 2, then when the market rises by 1%, the stock is expected to rise by 2% (and vice versa). However, for simplicity, the market return is usually referred to as beta (i.e., a beta coefficient of 1).

The good news is that if the market doesn't provide enough "beta" in one period, it may make up for it in the next cycle. You can see this in the chart below, which shows the 20-year rolling annualized real return of US stocks from 1871 to 2025:

This chart visually illustrates how returns rebound strongly after periods of downturn. Using US stock market history as an example, if you invested in US stocks in 1900, your annualized real return over the next 20 years would be close to 0%. However, if you invested in 1910, your annualized real return over the next 20 years would be approximately 7%. Similarly, if you invested at the end of 1929, the annualized return would be about 1%; while if you invested in the summer of 1932, the annualized return would be as high as 10%.

This huge difference in returns once again underscores the importance of overall market performance (Beta) relative to investment skill (Alpha). You might ask, "I can't control where the market goes, so what does it matter?"

This is important because it's a relief. It frees you from the pressure of "having to beat the market" and allows you to focus on what you can truly control. Instead of feeling anxious that the market is out of your control, think of it as one less thing to worry about. Think of it as a variable you don't need to optimize because you can't optimize it anyway.

So what should you optimize instead? Optimize your career, savings rate, health, family, and so on. Over the long course of life, the value created in these areas is far more meaningful than striving for a few percentage points of excess return in your investment portfolio.

Let's do a simple calculation: a 5% raise or a strategic career change can increase your lifetime income by six figures, or even more. Similarly, maintaining good health is an effective form of risk management, significantly mitigating future medical expenses. And spending time with family sets a positive example for their future. The benefits of these decisions far exceed the returns most investors hope to achieve by trying to outperform the market.

In 2026, focus your energy on the right things and chase Beta, not Alpha.

Related reading: Two-year investment retrospective: The feast of Bitcoin, the funeral of altcoins, why did your assets shrink in the bull market?