If you check "Use encryption when storing sensitive data" (recommended), you also need to select a master password.
Mozilla's Master Password dialog
Make sure to select a password that is easy to remember but also safe (i.e. not your spouse's or boat's name). As a rule of thumb, using a combination of numbers, letters and symbols (e.g. ~) is safer than just using numbers or letters. The difference regarding the password's ease of being cracked is enormous - it ranges from roughly 1 minute (just letters) to almost a year (letters, numbers and symbols). When you enter your master password, Netscape will show how safe it is. The longer the bar, the safer the password.
Now you may say "But if someone gets a hold of my master password, won't they know all my other passwords, as well?". Theoretically yes, but that person would need to a) know your password and b) have physical access to your PC.
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