After the stock market rolled off the table in 1987, battered investors scrambled to find a strategy that would enable them to reap at least some of the benefits of buying stocks without suffering the full impact of a crash.

There are plenty of ultra-safe investments -- certificates of deposit, Treasury paper and the like -- that continue to pay as promised no matter what the stock market does. But with that level of safety goes a generally lower level of return. Less risk, less reward. There are periods when the 7 percent or 8 percent offered by these types of investments looks awfully good, of course, but year in and year out that is not enough to get most people where they want to go financially.

In that atmosphere, the concept of asset allocation began getting renewed attention. This idea is simple enough: Don't put all your eggs in one basket. You spread your investments around in stocks, bonds, CDs, Treasuries, real estate, gold and anything else you can think of. Since it is unlikely that all assets will decline at once, the strategy provides a buffer against events like the 1987 market plunge.

While asset allocation is a simple theory, putting it into practice can be complicated. Keeping track of all the different assets can be a headache, and deciding when to shift money from one asset class to another is tricky.

To meet this need, the asset allocation mutual fund was born. Instead of trying to time the market yourself, simply buy shares in one of these funds and let a professional money manager decide how best to deploy your dollars.

Most of the funds now in existence were formed in early 1988, and in the generally rising market of the ensuing year or so, had little opportunity to show that they can protect investors in a downturn.

Until now.

Since mid-July, when it closed a fraction shy of 3000, the Dow Jones industrial average has lost more than 400 points, and stock mutual funds have taken it on the chin as well. Though some funds have bucked the trend, the average equity fund has dived nearly 8 percent so far this year, according to Lipper Analytical Services, which tracks mutual fund performance.

So, have asset allocation funds fulfilled their promise to hold their value better?

The answer so far seems to be a qualified yes.

Investors who expected complete protection have been disappointed. Asset allocation funds, on average, have declined. But they have declined far less than the overall markets and less than the average stock fund.

According to Lipper, the "flexible portfolio" class of funds, which includes asset allocation and related funds, has dropped 3.64 percent so far this year, compared with a loss of 7.72 for the general equity fund average.

Asset allocation fund managers are quick to point out that they don't promise there will be no losses. What they do offer, if they do their jobs right, is what one called "a smoother ride."

"In terms of the marketing pitch, if you will, we were not quite sold on the idea that an asset allocation fund is going to find the best market all the time, that it will preserve all your assets and come out looking like a hero," said Steven P. Somes, manager of the MetLife-State Street Managed Assets fund in Boston.

Instead, he said, the fund is best for people who have some money to invest but want to reduce risk. He called it "the first rung on the investment ladder," offering lower risk and over the long run probably lower returns than a pure stock fund.

Somes's fund returned 17.05 percent for 1989, compared with 23.99 percent for the Lipper equity fund average, but it has lost only 0.66 percent for 1990 as of the end of August.

Somes and other managers cut their losses by reducing their stock holdings and moving to bonds or cash. (When an investment manager says cash, he or she means very short-term, fixed-income securities, such as Treasury bills.)

Jeffrey Merriman of Seattle-based Merriman Mutual Funds said that even before the crisis in the Middle East, his firm had been shedding stocks. After being 100 percent invested as recently as June, his asset allocation fund, as well as others managed by his firm, are now entirely in cash.

If this sounds like an appealing way to invest in a gloomy economic climate, fund mangers and others warn to choose your fund very carefully and understand how it works.

Some, like Merriman's, emphasize market timing. They try to foresee movements in broad classes of assets and move in and out of them to maximize returns. When conditions warrant, they will move the whole portfolio. "We're not bashful; we really do go all to cash," Merriman said.

Others assign percentages to asset classes and make only minor adjustments, relying on classic asset allocation theory that not everything goes down at once.

Still others offer other variations. Baltimore-based T. Rowe Price Associates Inc. offers what it calls Spectrum funds that invest in other Rowe Price mutual funds. One emphasizes growth and invests in stock funds, while the other seeks income and invests in fixed-income funds.

Spokesman Steven E. Norwitz noted that these are not meant to be conventional asset allocation funds. "They are an attempt to offer a more hands-off, simple approach to investing. We are telling people, 'You pick the investment objective -- growth or income -- and we'll develop the investment strategy.' "

None of the types is perfect, of course. Market timers sometimes make bad calls. Funds with stable percentages will be hurt in rising markets by underperforming assets. And arrangements like Rowe Price's require more decisions on the investor's part.

And investors should remember that while some funds may match the stock market in a rally, most of the time they will be giving away some growth potential in exchange for reduced risk.

An investor who decides to put money into any of these asset allocation or related funds ought to realize that they can't avoid never having a period of loss, "and they should not expect to outperform the market on the upside," Norwitz said. And they should not be disappointed when they have a loss in a market decline.

Asset allocation is "sound investing, but if you buy, you ought to understand what the limitations are," he said.

For those lucky folks who have to make estimated federal income tax payments during the year, the installment for the third quarter is due tomorrow. Send your check along with the voucher from Form 1040-ES to the post office box listed on the form. For help, taxpayers can call 488-3100 in the District, 962-2590 in Baltimore and 800-424-1040 elsewhere.