`Waiting for some kind of signal'. SMART INVESTING

IT happened over a year ago. As of today, it's been exactly 14 months since the Dow Jones industrial average plunged 508 points, wiping out millions of dollars' worth of stock values.

An event like that isn't easily forgotten, and it explains why so many people have stayed on the sidelines. In the first place, many of them still haven't made up the losses. In the second place, if they have made some money since then, they would rather put it somewhere safer, like money market mutual funds, certificates of deposit, or short-term bond funds.

Individual investors ``haven't left the market,'' says John Markese, director of research at the American Association of Individual Investors. ``They just have not been active since last November, so they're sitting on their cash.'' While many people did pull some or all of their money out of the stocks in the days immediately after Oct. 19, 1987, most others stayed in, either hoping to recoup their losses, or - taking the long-term view - felt that they had lost only one year's worth of gains out of a five-year bull market.

But even for these people taking the optimistic view, the outlook for 1989 is a year that may not be much better than 1988. Interest rates have been moving up. Bond prices, which are tied to interest rates, have been falling, which erodes their purchasing power. Talk of a recession is heard more frequently. Foreign money markets aren't too happy with the idea of owning dollars.

``People seem to be waiting for some kind of signal,'' says Reg Green, editor of the Mutual Fund News Service in San Francisco. ``So far, there's no sign of improvement in [mutual fund] sales. There's been an across-the-board reduction in sales.''

So what's an investor to do?

Invest, the experts say. But do it smarter. Preservation of capital will continue to be important in 1989, but there will be opportunities in the markets for those willing to take a careful look.

Some professionals have already started. In a recent interview John M. Templeton, the mutual fund pioneer, said he expects another big bull market in the next five to 10 years.

Putting his money where his mouth is, Mr. Templeton has moved about two-thirds of his funds' assets into stocks in the United States.

Morton D. Silverman, managing director of Piper, Jaffray & Hopwood Inc., a Minneapolis brokerage, agrees. ``For equity portfolios, we think the values here are better than overseas.'' His firm is recommending a similar shift in assets, suggesting that about 60 percent be put in US stocks.

But all this assumes you want to be in the stock market. If you do, the values (read cheap prices) in the US seem to argue for domestic investing.

But if you are like most investors or potential investors, you probably feel like a 125-pounder on the sidelines at a professional football game. You'd like to get in, but the players on the field are a lot bigger than they used to be. They're also faster. That's the way many see themselves, compared with the big institutions that now play such a big role in the stock market.

It helps explain why people are hanging on to their cash, which may not be a bad idea. With rates on 90-day Treasury bills hovering up around 8 percent, investors are being nicely rewarded for waiting for stronger entry signals from the stock and bond markets.

``When you can get 8 percent in a money fund, there's no incentive to leave that safety,'' Mr. Markese says. ``Interest rates have to come down'' before people will be willing to put new money in stocks. Even then, he adds, the stock market ``will have to go up and stay up for a sustained period before many people come back.''

``It will take a more consistent market,'' agrees Patricia Ganley, editor of the United Mutual Fund Selector, a newsletter in Boston. ``A lot of people are afraid to get into the market right now.''

In the meantime, investment advisers are trotting out an old investment idea, jazzing it up and peddling it as the latest thing. The old idea is called ``diversification,'' and its late-80s reincarnation is ``asset allocation.'' There may be some subtle differences, but the basic advice is the same: Don't put all your eggs in one basket.

Asset allocation is simply a planned method of spreading your money among different types of investments. It can follow a fixed formula, where you invest the money and leave it there, or else you can alter the mix and change particular investments from time to time, depending on the shifts in the economy or the various markets, or changes in your own life.

While asset allocation is not known for providing spectacular returns, it does provide more safety.

The main goal of this ``all weather'' system, after all, is to offset losses in one area with gains in another, while letting the investor get a good night's sleep.

``Asset allocation is the latest buzzword,'' says Ms. Ganley, whose newsletter recently discussed the concept. ``It's that same thing as diversification, but since so many people are talking about it, we had to write something.''

``Asset allocation is diversification with a discipline,'' Mr. Silverman says. ``People usually consider diversifying just with cash, stocks, and bonds.'' But a properly allocated bond portfolio, he says, would contain bonds from several issuers and staggered maturities to protect against big swings in bond prices and steady income over a long term, he says.

One of the differences between today's asset allocation programs and yesterday's diversification is selection. Five to 10 years ago, an investor who chose to diversify through mutual funds could pick among stock, bond, and money market funds that were all fairly similar, although different investment companies had different performance records.

Today, there are short-, medium-, and long-term bond funds (both taxable and tax-free), international bond funds of varying maturities, stock-index funds, real estate funds, a host of funds that invest in various sectors, and - for those who aren't put off by the term - junk bond funds, more politely known as high-yield funds.

The key to success in asset allocation is picking the right mix for each individual. Getting the mix right includes making allowances for different risk tolerances, ages, goals, income, and family needs. If you don't like any risks, for example, and you don't want to worry about losing principal, you should stick with CDs, money market funds, short-term Treasury certificates, and US Savings Bonds.

A conservative investor who wants to preserve principal but wants a better return might choose among intermediate-term high-grade corporate bonds, convertible bonds and convertible preferred stock, balanced mutual funds, growth and income funds, and utility stocks. If you do try convertibles, a convertible bond mutual fund, with professional management of this fairly complex investment, might be the best place to start.

Someone interested in even greater return and willing to take more risk might look at stocks with a record of paying high dividends, good-quality US and foreign stocks, and real estate investments purchased with all cash. Over the past 30 years, the US stock market has had an average return of better than 11 percent a year, and over the past 10 years, of nearly 15 percent.

Much higher on the risk-reward spectrum are investments like precious metals, collectibles, oil and gas development deals, commodities, options, and highly leveraged real estate. While some of these, like precious metals, have good long-term records of guarding against inflation, they may not provide the real after-tax gains you are seeking.

For many people, their long-term investment goals - retirement, college, a second home, a special vacation - make it almost impossible to avoid the stock market altogether. Meeting the goals simply requires too high an after-tax return.

``If you want 10 percent or more after-tax return,'' Silverman says, ``you have to have some money in the stock market.'' He suggests that at least 10 to 20 percent of the total portfolio be put in stocks for this kind of yield.

``But if you want a 15 percent total return, you have to be 100 percent in stocks,'' he adds.

Not many people want to go that deeply into those markets, however. For one thing, the game is very different from before.

``People are realizing that the market's a lot riskier than it had been previously,'' Markese says. ``They are concerned about the amount of cash that can move very quickly.'' This concern is not eased when investors see big institutions using sophisticated hedging techniques, and can buy and sell millions of shares almost instantaneously.

``There is a feeling that the big guys can do all this stuff and the little guy can't,'' says Ms. Ganley of the Mutual Fund Selector. ``But remember, mutual funds can invest like the big guys, too.''

Although the hearings and reports that followed last year's stock market plunge haven't resulted in major reforms, it doesn't seem to bother many investors, she says. ``A lot of people don't pay much attention to that. They just watch their own money.''