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”

Translation: Felix, PANews

The investment community generally believes that excess returns (Alpha), or the ability to outperform the market, should be the goal for investors. This makes perfect sense. 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 market 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, consistently beating the market by 5% each year. Pat, on the other hand, is a poor investor, underperforming the market by 5% annually. If Alex and Pat invest over the same period, Alex’s annual return will always be 10% higher than Pat’s.

But what if Pat and Alex start investing at different times? Is there a situation where, despite Alex’s superior skill, Pat’s returns actually surpass Alex’s?

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

Comparison of 20-year actual annualized total returns of U.S. stocks from 1960-1980 and 1980-2000 In this scenario, Alex’s annual return from 1960 to 1980 is 6.9% (1.9% + 5%), while Pat’s from 1980 to 2000 is 8% (13% – 5%). Although Pat’s investing ability is inferior to Alex’s, in terms of inflation-adjusted total returns, Pat performs better.

But what if Alex’s opponent is a true investor? Currently, assume Alex’s competitor is Pat, who lags the market by 5% annually. In reality, Alex’s real opponent should be an index investor whose returns match the market every year.

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

Although this is an extreme example (an outlier), you might be surprised to find that having Alpha often results in performance that lags behind the historical average. As shown in the chart below:

Probability comparison of Alpha size and underperformance of the index across all 20-year cycles in the U.S. stock market from 1871 to 2005 As you can see, when you have no Alpha (0%), the probability of beating the market is essentially like flipping a coin (about 50%). However, as Alpha increases, the compounding effect of returns will reduce the frequency of underperforming the index, but the increase is not as large as you might imagine. For example, even with an annual Alpha of 3% over 20 years, there is still a 25% chance of underperforming the index in other periods of U.S. market history.

Of course, some might argue that relative returns matter most, but I personally disagree. Ask yourself: would you prefer to earn the market average during normal times, or only lose less than others during a major depression (i.e., achieve positive Alpha)? I would definitely choose index returns.

After all, most of the time, index investing yields quite good returns. As shown in the chart below, the actual 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 indicates that while investing skills are important, market performance is often more critical. In other words, pray for Beta, not Alpha.

From a technical perspective, β (Beta) measures how much an asset’s returns fluctuate relative to the market. If a stock’s Beta is 2, then when the market rises 1%, that stock is expected to rise 2% (and vice versa). But for simplicity, market returns are often referred to as Beta (i.e., 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 returns of U.S. stocks from 1871 to 2025:

This chart vividly demonstrates how returns tend to rebound strongly after downturns. For example, in U.S. stock history, if you invested in 1900, your next 20 years’ annualized real return would be close to 0%. But if you invested in 1910, the next 20 years’ annualized real return would be about 7%. Similarly, investing at the end of 1929 yielded an annualized return of about 1%; while investing in summer 1932, the return soared to 10%.

This huge variation in returns again underscores the importance of overall market performance (Beta) relative to investing skill (Alpha). You might ask, “I can’t control how the market moves, so why does it matter?”

It matters because it’s a form of liberation. It frees you from the pressure of “must beat the market,” allowing you to focus on what is truly controllable. Instead of stressing over the market’s uncontrollability, see it as one less thing to worry about. View it as a variable you don’t need to optimize because you simply cannot.

So, what should you optimize instead? Your career, savings rate, health, family, and so on. Over the long horizon of life, the value created in these areas far exceeds the gains from chasing a few percentage points of excess return in your portfolio.

A simple calculation: a 5% raise or a strategic career shift can add six figures or more to your lifetime income. Similarly, maintaining good health is a form of high-efficiency risk management, significantly offsetting future medical expenses. Spending quality time with family can set a positive example for their future. The benefits of these decisions far surpass what most investors hope to gain by trying to beat the market.

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

Related reading: Two-year investment review: Bitcoin’s feast, altcoin’s funeral, why your assets shrink during a bull market?