WHAT IS THE RISK TO INVEST WITH PARAGON?

This Risk versus Return Graph is a reproduction of a graph that regularly appeared in the MoniResearch newsletter. The underlying assumption of this analysis is that it makes no sense to measure investment returns without measuring the amount of risk required to generate those returns. This graph measures the performance versus the risk of the Paragon Top Flight Portfolio since its inception in January 1998 according to the Ulcer Index.

Pension consultants refer to this as a Northwest Quadrant graph. The most desirable place to be is the furthest North and the furthest West.

Most investors assume that high risk (and the additional stress that goes with it) inevitably accompanies the potential for high returns. However, there is an interesting statistical formula that seeks to measure the amount of stress various investment strategies typically inflict on investors. The Ulcer Index, according to Nelson Freeburg, the respected editor of Formula Research. is perhaps the most fully realized statistical portrait of risk there is.

The Ulcer Index is different from other risk measurement indexes, such as standard deviation, beta and the Sharpe ratio, because it does much more than simply measure portfolio volatility. Traditional risk indexes falsely assume that all volatility is bad. The reality is that investors welcome upside volatility-but deplore downside volatility .

The Ulcer Index accounts for this basic psychological fact by ignoring upside volatility and penalizing downside volatility. In addition, it increases the penalty based on the depth and the duration of the drawdown. At a more technical level, the Ulcer Index calculates the difference between each day’s equity and the most recent equity peak. The formula then squares these numbers, averages them, and uses the square root of the average as the Ulcer Index. The smaller the number, the lower the risk.

Paragon’s Top Flight Portfolio certainly delivers the kinds of returns that are typically associated with high-risk funds. But does it carry the same risk-and the same potential to cause ulcers-as other aggressive, high-return funds? According to the Ulcer Index, the answer is a definitive no.

Since its inception from January 1, 1998 through September 2011, the Paragon Top Flight Portfolio has generated an Ulcer Index rating of 13.05, compared to 20.55 for the S&P 500 and 49.42 for the NASDAQ.

How does the Top Flight Portfolio maintain such high returns with such a low Ulcer Index rating?

Paragon’s models and systems are based on a quantitative and technical approach to money management. Generally, fundamental analysis is not used. Using this very innovative and creative approach to money management we created the Top Flight Portfolio which has generated exceptional returns while taking on relatively low levels of risk.

*The Ulcer Index is a measure of downside volatility. The Index was first described in The Investor’s Guide to Fidelity Funds: Winning Strategies for Mutual Fund Investors. by Peter Martin & Byron McCann. The index is computed using the following root-mean square retracement measure:

UI = square root [the sum of all R^2 values/N)

R = the percent a fund is below its highest previous value

N = the number of days in the period