Roy's Safety-First Rule Definition & Example

Updated August 5, 2020

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.

Personalized Financial Plans for an Uncertain Market

In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.