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 is always dependent on the market's performance. If the market performs poorly, alpha may not necessarily lead to 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% each year. If Alex and Pat invest over the same time 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 it possible that despite Alex's superior skill, Pat's return could 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 return would surpass Alex's. The chart below illustrates this:
In this scenario, 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%). Even though Pat is a less skilled investor than Alex, Pat's performance was better in terms of total inflation-adjusted returns.
But what if Alex's competitor was a real investor? Currently, we assume Alex's competitor is Pat, the person who lags the market by 5% each year. But in reality, Alex's true competitor should be an index investor who earns returns equal to the market 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 how frequently having alpha leads to underperformance relative to historical periods. As shown in the chart below:
As you can see, when you have no alpha (0%), the probability of outperforming the market is essentially a coin flip (about 50%). However, as alpha increases, the compounding effect of returns does reduce the frequency of underperforming the index, but the increase 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 with this view. Ask yourself: 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 a 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 actual annualized returns of U.S. stocks have fluctuated by decade but have mostly been positive (Note: Data for the 2020s only shows returns up to 2025):
All of this shows that while investment skill is important, the market's performance is often more critical. In other words, pray for Beta, not Alpha.
Technically speaking, β (Beta) measures the magnitude of an asset's returns relative to market 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 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 visually demonstrates how returns can rebound strongly 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%. But 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, the annualized return was about 1%; whereas if you invested in the summer of 1932, the annualized return was as high as 10%.
This huge difference in returns again confirms 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 is this important?"
It's important 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 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苦苦追求a few percentage points of excess return in an investment portfolio.
Do a simple calculation: a 5% raise or a strategic career transition can add six figures or more to your lifetime income. Similarly, maintaining good health is efficient risk management, significantly hedging against future medical expenses. And spending time with family sets a positive example for their future. The benefits from 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.
