A security Issue happen if Setting all the files & folders to 777 will make them writable by everyone.!
For the normal operation or installation of a Magento store, only 2 folders need to be writable:
During installation Magento Install Wizard will create app/etc/local.xml file which contains database configuration and global encryption key for your Magento copy.
Meaning app/etc folder has to be writable to web service.
If you wish to use web based downloader for installation, upgrades or MagentoConnect extensions installation, you will need to have write permissions on ALL magento files including the root Magento folder.
Files and folders will need to be returned to 655 non-writable permissions after installation.