There's a popular belief in the investment industry that alpha, or the ability to beat the market, is the thing that you should seek out as an investor. This is perfectly logical. All else being equal, more alpha is always better than less.
But, having alpha doesn't always mean better investment results. Why? Because your alpha is always relative to whatever the market is doing. And if the market isn't doing well, then alpha won't necessarily save you. Let me illustrate with an example.
Imagine two investors: Alex and Pat. Alex is very skilled and always beats the market by 5% a year. Pat, on the other hand, is a terrible investor and always underperforms the market by 5% a year. If Alex and Pat invested at the same time, Alex would always outperform Pat by 10% per year.
But, what if Pat started investing at a different time than Alex? Is there a scenario where Pat could actually outperform Alex despite Alex's superior skill?
Yes! In fact, if Alex had invested in U.S. stocks from 1960-1980 and Pat had invested in them from 1980-2000, it would be Pat who outperformed Alex after 20 years. This is illustrated in the chart below (which I've shared before) showing the 20-year real annualized return in U.S. stocks from 1960-1980 compared to the same return from 1980-2000:
In this case, Alex earns 6.9% annually [1.9% + 5%] from 1960-1980 while Pat earns 8% annually [13% – 5%] from 1980-2000. Pat outperforms on a total return, inflation-adjusted basis despite being a worse investor.
But what if Alex had to go against a real competitor? So far we assumed that Alex's competition was Pat, someone who underperforms the market by 5% per year. But, in reality, Alex's actual competition would be an index investor who matches the market return each year.
In this scenario, Alex could beat the market by 10% per year from 1960-1980 and he'd still underperform an indexer from 1980-2000!
I know that this is an extreme example (i.e., it's an outlier), but you'd be surprised at how often having alpha leads to underperformance relative to history. The chart below shows how often someone would've underperformed an index investor over all 20-year periods from 1871 to 2025 based on the amount of alpha that they have:
As you can see, when you have no alpha (0%), the probability of you underperforming an indexer is basically a coin flip (~50%). However, as your alpha increases, you underperform less often because your returns start increasing. But they don't increase as much as you think. For example, even with 3% annualized alpha over a 20-year period, there is still a 25% chance that you'd underperform an indexer in some other period throughout U.S. market history.
Of course, some might argue that relative performance is all that matters, but I disagree. After all, would you rather get the market return in a normal period or lose less money than everyone else (i.e., have positive alpha) during The Great Depression? I'll take the index return every time.
After all, that index return would've led to a pretty good result most of the time. As you can see in the chart below, the real annualized return of U.S. stocks by decade has varied, but been mostly positive [Note: the 2020 decade only shows the returns experienced through 2025]:
All this demonstrates that while investment skills matter, many times how the market does matters more. In other words, pray for beta, not alpha.
Technically, β ("beta") is a measure of how much an asset's return is expected to vary relative to the market. So, if a stock has a beta of 2, when the market goes up 1%, we'd expect the stock to go up 2% (and vice versa). But, for simplicity's sake, I refer to the market return as beta (i.e., a beta of 1).
The good news is that if markets don't provide enough "beta" in one period, they may just do it in the next. You can see this in the chart below showing the rolling 20-year annualized real returns of U.S. stocks from 1871-2025:
This chart illustrates how quickly returns can shoot upward after a period of underperformance. For example, if you invested in U.S. stocks in 1900, your annualized real return would've been close to 0% over the next 20 years. But, if you invested in them in 1910, your annualized real return would've been about 7% for the next 20 years. Someone who invested in late 1929 got about 1% annualized while someone who invested in the summer of 1932 got 10% annualized.
This large variance in returns exemplifies the importance of overall market performance (beta) over investment skill (alpha). And, I know what you might be thinking, "Nick, I can't control what the market does, so why is this important?"
It's important because it's freeing. It frees you up to focus on the things that you can actually control. Instead of feeling like the market is outside of your command, see it as one less thing you have to worry about. See it as one less variable you have to optimize for because you can't optimize for it.
What can you optimize for instead? Your career, your savings rate, your health, your family, and much more. These will all create more value over your life than a few extra percentage points on your portfolio.
A 5% raise or a strategic career pivot can increase your lifetime earnings by six figures (or more). Staying in shape can significantly reduce your future medical costs. Being there for your family can set the right example for their future. The benefits of such decisions far exceed what most investors could hope to earn by trying to beat the market.
Trust me on this one. Focus on the right things in 2026. Then pray for beta, not alpha.
Thank you for reading.
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This is post 483. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data