A Century of U.S. Stock Market Revelations: Forget Alpha, Chase Beta

Original Author: Nick Maggiulli, Finance Blogger & Author of "Just Keep Buying"

Original Compilation: Felix, PANews

The investment world generally believes that Alpha, the ability to outperform the market, is the goal investors should pursue. This is entirely logical. All else being equal, more Alpha is always better.

However, having Alpha does not always mean better investment returns. Because your Alpha always depends on the market's performance. If the market performs poorly, Alpha may not necessarily bring you profits.

For example, imagine two investors: Alex and Pat. Alex is very skilled at investing, outperforming the market by 5% every year. Pat, on the other hand, is a poor investor, underperforming the market by 5% every year. If Alex and Pat invest during the same period, Alex's annual return is always 10% higher than Pat's.

But what if Pat and Alex start investing at different times? Could there be a scenario where, despite Alex's superior skill, Pat's returns actually exceed Alex's?

The answer is yes. In fact, if Alex invested in U.S. stocks from 1960 to 1980, and Pat invested in U.S. stocks from 1980 to 2000, then after 20 years, Pat's investment returns would surpass Alex's. The chart below illustrates this:

Comparison of 20-year real annualized total returns for U.S. stocks from 1960-1980 vs. 1980-2000

In this case, Alex's annual return from 1960 to 1980 was 6.9% (1.9% + 5%), while Pat's annual return from 1980 to 2000 was 8% (13% – 5%). Despite Pat's inferior investment skill, Pat's performance was better in terms of total real (inflation-adjusted) returns.

But what if Alex's opponent was a real investor? Currently, we assume Alex's competitor is Pat, the person who lags the market by 5% annually. But in reality, Alex's true opponent should be an index investor who earns the market return each year.

In this scenario, even if Alex outperformed the market by 10% annually from 1960-1980, he would still lag behind an index investor from 1980-2000.

Although this is an extreme example (i.e., an outlier), you might be surprised at how frequently having Alpha leads to underperformance relative to historical periods. As shown in the chart below:

Probability of underperforming the index vs. Alpha size across all 20-year periods for U.S. stocks from 1871 to 2005

As you can see, when you have no Alpha (0%), the probability of beating the market is essentially a coin flip (~50%). However, as Alpha increases, the compounding effect of returns does reduce the frequency of underperforming the index, but the improvement is not as large as one might think. For example, even with an annual Alpha of 3% over a 20-year period, there is still a 25% chance of underperforming an index fund during other periods in U.S. market history.

Of course, some might argue that relative performance is what matters, but I personally disagree. Would you rather have the market's average return during normal times, or just "lose less money" than others (i.e., achieve positive Alpha) during the Great Depression? I would certainly choose the index return.

After all, most of the time, index returns deliver fairly good results. As shown in the chart below, the real annualized returns of U.S. stocks fluctuate by decade but are mostly positive (Note: Data for the 2020s only shows returns up to 2025):

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

Technically speaking, Beta measures how much an asset's returns move relative to the market's movements. If a stock has a Beta of 2, it is expected to rise 2% when the market rises 1% (and vice versa). But for simplicity, market return is often 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 might make up for it in the next cycle. You can see this in the chart below, which shows the 20-year rolling annualized real returns for U.S. stocks from 1871 to 2025:

This chart visually shows how returns have strongly rebounded after downturns. Taking U.S. stock history as an example, if you invested in U.S. 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 about 7%. Similarly, investing at the end of 1929 yielded an annualized return of about 1%; whereas investing in the summer of 1932 yielded a high annualized return of 10%.

This huge disparity in returns 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 why does this matter?"

It matters because it's liberating. It frees you from the pressure of "having to beat the market," allowing you to focus on what you can actually control. Instead of feeling anxious that the market is beyond your command, see it as one less thing to worry about. See it as a variable you don't need to optimize because you simply cannot optimize it.

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

Do a simple calculation: a 5% raise or a strategic career pivot can add six figures, or even more, to your lifetime earnings. Similarly, maintaining good physical health is effective risk management, significantly hedging against future medical expenses. And spending quality time with family sets a positive example for their future. The benefits of these decisions far exceed the gains most investors can hope to achieve by trying to beat the market.

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