Caution and conservatism were the watch-words today at an investment outlook seminar sponsored by T. Rowe Price Associates, the Baltimore-Washington area's largest investment-counseling firm.

Faced with the prospect of renewed economic decline in 1981, coupled with continued high interest rates that make competitive investments attractive, investors should exercise near-term caution in buying common stocks, said Rowe Price Vice President Edward J. Mathias.

Edward A. Taber, president of Rowe Price's Prime Reserve Fund, declared that the money market fund's strategy for next year would be characterized by its conservatism, by keeping its maturities short as a defense against rising interest rates.

The investment company's economists feel that interest rates are close to the peak "in terms of time, but perhaps not close in terms of how much further rates can rise before they crest and decline."

In other words, Taber added, "the period of fixed-income marketplace pain will likely be shortlived, but the pain may reach new levels of intensity." The end could come as soon as year-end or as late as the end of the first quarter of 1981, they said.

Even as Taber spoke, the firm's projection of a 20 percent prime rate became a reality. Rowe Price sees long-term corporate bonds yielding more than 14 percent next year. Yet by the end of 1981 Taber predicted yields on long-term bonds will be only 2 or 3 percentage points lower than at peak levels, because the decline in interest rates will be slower than in the second quarter of this year when they plummeted by 50 percent.

Noting investors disenchantment with the bond market, which has become as volatile as the stock market, Taber proposed some basic concessions to restore the bond market's vitality. These included more emphasis on put options, whereby the bondholder has the option of selling the bond back to the issuer at par at a specified date before maturity.

Another innovation involves packaging the sale of bonds with the sale of a short position in the futures market as a means of protecting the bondholder against price decline caused by higher yields.

In the muncipal market, Peter Gordon's advice to investors was to maintain large cash reserves while buying short- or medium-term bonds, currently yielding about 9 percent tax free. Even though municipal bond rates are at their historic high -- some new issues carry yields of 12 percent or more -- he cautioned against locking in these rates now when interest rates can go even higher this year. But, as always timing is the key; Gordon projects lower yields in the first quarter or 1981.

Price's long-term common stock strategy will focus on energy production companies of intermediate size, such as Atlantic Richfield. It also favors small companies with good energy exploration potential like Pogo Producing Co. and energy service companies like Schlumberger.

Besides energy, Price sees investment opportunities in natural resources and in selected consumer stocks, such as home entertainment, cable television and gambling companies. And as outside bets, in anticipation of interest rate declines, he recommends stocks like BankAmerica and American Express.