Roy's Safety-First Rule

Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated January 16, 2021

What is Roy's Safety-First Rule?

Roy's safety-first rule is a measure of the minimum returns an investor requires from a portfolio. The formula for Roy's safety-first rule is:

Roy's Safety-First Rule = (Expected return for portfolio – Threshold return for portfolio)/Standard deviation of portfolio

How Does Roy's Safety-First Rule Work?

The mechanics of the formula are simple: Input the investor's minimum required return, the expected return for the portfolio, and the standard deviation for the portfolio. By using this formula for various portfolio scenarios (i.e., using different investments, using different weightings of asset classes), investors compare portfolio choices based on the probability that their returns will not meet the minimum threshold. The best portfolio is the one that minimizes the chances that the portfolio's return will fall below the threshold.

Why Does Roy's Safety-First Rule Matter?

The safety-first rule is much more than a formula. It is a philosophy. By setting a minimum acceptable return for a portfolio, the investor is able to sleep at night because he or she knows that the risk of not achieving their goals is much lower. The investor first makes the portfolio "safe," and anything above that minimum threshold is gravy.

Ask an Expert about Roy's Safety-First Rule
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Roy's Safety-First Rule.
Be the first to ask a question

If you have a question about Roy's Safety-First Rule, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Roy's Safety-First Rule, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Roy's Safety-First Rule

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms