Don't be obsessed with Alpha; the Beta that the market gives you is more important

Original Title: Pray for Beta, Not Alpha

Original Author: Nick Maggiulli, author of "Just Keep Buying"

Original Translation: Felix, PANews

The investment community generally believes that excess returns (Alpha), or the ability to outperform the market, is the goal investors should pursue. This makes perfect sense. Other things being equal, more Alpha is always better.

However, having Alpha does not always mean better investment returns. This is because your Alpha always depends on market performance. If the market performs poorly, Alpha may not lead to profits.

For example, imagine two investors: Alex and Pat. Alex is very skilled at investing, consistently outperforming the market by 5% each year. Pat, on the other hand, is a poor investor, lagging the market by 5% each year. 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 scenario where, despite Alex's superior skills, Pat's returns exceed Alex's?

The answer is yes. In fact, if Alex invests in U.S. stocks from 1960 to 1980, while Pat invests from 1980 to 2000, then 20 years later, Pat's investment returns will surpass Alex's. The following chart illustrates this:

Comparison of the 20-year actual annualized total returns of U.S. stocks from 1960 to 1980 and from 1980 to 2000

In this case, Alex's annual return from 1960 to 1980 is 6.9% (1.9% + 5%), while Pat's annual return from 1980 to 2000 is 8% (13% - 5%). Although Pat's investment skills are inferior to Alex's, Pat performs better in terms of inflation-adjusted total returns.

But what if Alex's competitor is a real investor? Currently, we assume Alex's competitor is Pat, who lags the market by 5% each year. However, in reality, Alex's true competitor should be an index investor whose annual return matches the market.

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

Although this is an extreme example (i.e., an outlier), you may be surprised to find that having Alpha leads to underperformance relative to historical performance quite frequently. As shown in the following chart:

Comparison of the size of alpha and the probability of underperforming the index across all 20-year periods 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 equivalent to a coin toss (about 50%). However, as Alpha returns increase, the compounding effect of returns does reduce the frequency of underperforming the index, but the magnitude of 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% chance of underperforming index funds during other historical periods in the U.S. market.

Of course, some may argue that relative returns are what matter most, but I personally do not agree with this view. Would you rather achieve average market returns during normal times, or would you prefer to "lose a little less" than others during the Great Depression (i.e., achieve positive Alpha returns)? I would certainly choose index returns.

After all, in most cases, index returns yield quite decent profits. As shown in the following chart, the actual annualized returns of U.S. stocks vary over decades but are mostly positive (Note: Data for the 2020s only shows returns up to 2025):

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

From a technical standpoint, β (Beta) measures the extent to which an asset's returns move relative to market fluctuations. If a stock has a Beta of 2, then when the market rises by 1%, this stock is expected to rise by 2% (and vice versa). For simplicity, market returns are typically referred to as Beta (i.e., a beta coefficient of 1).

The good news is that if the market does not provide enough "Beta" during one period, it may compensate with returns in the next cycle. You can see this in the following chart, which shows the 20-year rolling annualized real returns of U.S. stocks from 1871 to 2025:

This chart visually demonstrates how returns rebound strongly after periods of stagnation. For example, in U.S. stock market history, if you invested 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, if you invested at the end of 1929, your annualized return would be around 1%; whereas if you invested in the summer of 1932, your annualized return would soar to 10%.

This enormous difference in returns once again underscores the importance of overall market performance (Beta) relative to investment skills (Alpha). You might ask, "I can't control how the market will move, so why does this matter?"

It matters because it is a form of liberation. It frees you from the pressure of "having to beat the market" and allows you to focus on what is truly controllable. Instead of feeling anxious about the market being out of your control, view it as one less thing to worry about. Consider it a variable you do not need to optimize because you cannot optimize it at all.

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

A simple calculation shows that a 5% raise or a strategic career shift can increase your lifetime income by six figures or more. Similarly, maintaining good physical health is also an effective risk management strategy, significantly offsetting future medical expenses. Moreover, spending time with family can set a positive example for their future. The benefits of these decisions far outweigh the returns most investors hope to achieve by trying to beat the market.

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

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