Over the past 70 years Modern Portfolio Theory has produced results for the average investor that are 5% per year below the S&P. The Stars buy and hold strategy has outperformed the S&P by a factor of 17 over the past 25 years. On average the return over 25 years is twice the S&P. Stars is 26 percentage points per year better than the average investor.

Financial advisors use alpha and beta to help you develop the best risk adjusted return for your desired risk level. Alpha is a measure of value added. Beta is a measure of market risk. High alpha is desirable while high beta indicates high risk.

The S&P has a beta of 1 and an alpha of 0 yet 85% of portfolios underperform it by 5% per year. The Stars buy and hold strategy holds SPY and TQQQ. The majority weighting of these are extremely high alpha because they represent the best 1.5% of all stocks. TQQQ is very high beta. The ability of Stars to earn twice the S&P is due almost completely to TQQQ because of its volatility.

In my opinion the long term investor should be looking for the best relative performance. It doesn’t matter whether it is alpha or beta that produces the outperformance. If beta risk is a problem, it will show up in performance.

Many are beginning to realize that the system or model is more important than risk adjusted returns in producing great long term performance.