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" Translator: Felix, PANews

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

However, having Alpha doesn't always mean better investment returns. Because your Alpha always depends on market performance. If the market performs poorly, Alpha may not necessarily make you profitable.

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 during the same period, 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 surpass Alex's? The answer is yes. In fact, if Alex had invested in US stocks between 1960 and 1980, and Pat between 1980 and 2000, then 20 years later, Pat's investment returns would have exceeded Alex's. The following figure illustrates this:

In this case, Alex had an annualized return of 6.9% (1.9% + 5%) from 1960 to 1980, while Pat had…

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, as alpha returns increase, the compounding effect of returns will certainly reduce the frequency of underperforming the index, but the increase is not as large as one might imagine.

For example, even with an annual alpha return of 3% over a 20-year period, there's still a 25% probability that an index fund would underperform in other periods of US market history. Of course, some might argue that relative returns are paramount, but I personally disagree. Ask yourself: would you rather achieve the market average return in normal times, or simply "lose a little less money" (i.e., achieve positive alpha) during a recession? I would definitely choose index returns. After all, in most cases, index returns deliver quite good results. As shown in the chart below, the actual annualized return of US stocks fluctuates over a decade, but is mostly positive (Note: Data for the 2020s only shows returns up to 2025):

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

Technically speaking, β (Beta) 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).

For simplicity, market returns are 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: [Image of chart would be inserted here] This chart visually illustrates how returns can rebound strongly after periods of stagnation. For example, if you invested in US stocks in 1900, your annualized real return for 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 again underscores the importance of overall market performance (Beta) relative to investment skills (Alpha). You might ask, “I can’t control where the market goes, so what does it matter?” It matters 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 about the market being 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 an investment portfolio. To put it simply, a 5% raise or a strategic career change can increase your lifetime income to six figures or more. Similarly, maintaining good health is effective 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: chase Beta, not Alpha.