(MONEY Magazine) – Rummaging through the nostalgia bin of the '70s, amid the disco music, platform shoes and Billy Beer, you'll find a word that fills most investors' hearts with dread: stagflation. It was used to describe chronic economic stagnation coupled with high inflation. This deadly combination for stocks and bonds deepened the bear market that accompanied the 1973-75 recession, when stock prices nosedived by 34% as the gross national product declined by 4.3% and inflation raged as high as 12% a year. Sorry to say it, but yesterday's memories appear to be today's trend. ''It seems the soft landing everyone's been hoping for has turned out to be a mild form of stagflation,'' says Bruce Steinberg, a Merrill Lynch senior economist. Briefly, economists see the year shaping up like this:

INFLATION. While no one envisions a replay of double-digit price increases, the Commerce Department reported in March that the consumer price index for February rose at a disturbingly high annual rate of 6%. ''We were expecting it to get down to 2% to 3% by the end of this year,'' says Steve Leuthold, an investment strategist in Minneapolis. ''We're having second thoughts about that now.'' At even 5%, inflation would cause the purchasing power of $1,000 to decline to $614 in just 10 years.

THE ECONOMY. Rising interest rates in West Germany and Japan could prevent U.S. rates, which are up by half a percentage point since December, from falling, thereby squeezing the already anemic profit margins at U.S. companies. ''From the point of view of corporate earnings, we're already in a recession,'' says Steinberg. He expects corporate profits to be 14% lower in the first quarter than they were a year ago. That sort of decline usually occurs in the depths of a recession (officially defined as back-to-back quarterly drops in the U.S. gross national product) and typically sends share prices plummeting 25%. Fortunately, there are investments that can help you survive -- even prosper -- in the face of both inflation and recession. To find them, MONEY interviewed two dozen securities analysts, money managers and other financial advisers. Some of the recommendations, such as the combination of gold and zero-coupon bonds advocated by James Benham, 54, chairman of the Benham Capital Management Group, a family of 21 no-load mutual funds in Mountain View, Calif., will perform best under acid-test conditions -- a deep recession or double-digit inflation. Benham's ultraconservative investing philosophy is proclaimed by the name of the 20-piece jazz band in which he plays trumpet and flugelhorn: Full Faith & Credit. But given the greater likelihood of a milder economic slowdown, such as the 1.1% growth in the fourth quarter of '89, or a moderate 4% to 6% rise in consumer prices, other investment choices such as high-quality growth stocks or utilities may offer more sensible protection. Don't devote your entire portfolio to these investments. Their annual returns may be modest -- around 10% or so. But consider adding one or more of them -- perhaps amounting to 15% of your holdings -- to give your portfolio ballast to see you through even the choppiest economic times. The six recession-beating, inflation-whipping recommendations are listed in the order of protection they provide, from sturdy shields against the worst that economists expect to safeguards against less extreme conditions. For people with only a few thousand dollars to invest, we've included a selection of asset-allocation mutual funds, which try for double-digit gains and are designed to hold up under virtually all economic conditions.

GOLD AND ZERO-COUPON BONDS. Taken separately, these two investments are among the most volatile you can make -- as illustrated by gold's 6% price plunge one day in March when Saudi Arabia reportedly sold heavily. By contrast, a fifty- fifty mix of gold and zero-coupon Treasury bonds creates a low-risk combo that can provide steady returns as the two investments' fluctuations offset one another in times of recession and high inflation. ''When zeros suffer from the rising interest rates that come with inflation, the value of gold goes up,'' says Benham. ''And while gold doesn't do well in a recession, the fall in interest rates during a slump makes the value of zeros soar.'' Here's a hypothetical example of how this odd couple work: Let's say you had split $10,000 evenly between gold bullion and 30-year zero-coupon bonds on Jan. 1, 1977, the start of a four-year period in which inflation peaked at 13.3%. (Since zeros were not available in 1977, we've calculated what their results would have been in the last inflation spiral.) The 6.7-percentage- point rise in interest rates during that period would have slashed the ! zeros' market value by more than half, to roughly $2,200. That same inflation, however, pushed up the price of gold by 343%, which would have more than quadrupled the value of your holdings to almost $22,000. Result: an overall gain of 144%. Had you continued to hold that same portfolio through the 16-month recession from July 1981 through November 1982, your gold would have shown a measly 1.5% gain but your zeros would have jumped 55% as the recession triggered a 2.4- percentage-point decline in interest rates. The strategy's drawback is that if the next few years are marked by stable prices and steady economic growth, a portfolio of gold and bonds may return only 4% or so annually. By putting 15% of your assets in the dependable duo, however, you can greatly reduce your overall risk of major losses, while giving up less than a percentage point a year of total return. Not a bad bargain. You can carry out this strategy with gold bullion and actual zero-coupon bonds, but it's easier and cheaper to use mutual funds. To shoot for the biggest gain during a recession on the zero portion of the mix, choose Benham's Target Maturities Trust: 2020 (no load; 800-472-3389), whose Treasury zeros mature in 30 years. (For the recent performance of Benham's zero funds, see Fund Watch on page 50.) The longer a bond's maturity, the more its price rises when interest rates fall. Keep in mind, though, that if interest rates climb one percentage point, this fund's value will drop roughly 29%. If you prefer less volatility, go with Benham's 2005 or 2010 funds, whose zeros have maturities of 15 and 20 years, respectively. For gold, stick to funds that generally remain fully invested in gold-mining shares, bullion or both. Reason: a gold fund's value won't rocket up at the first sign of inflation if the manager has diversified into cash or other metals. Two funds that limit themselves to gold stocks: Benham's Gold Equities Index Fund (no load), up 18.6% for the year to March 1, which holds the shares of 35 North American gold-mining companies, and USAA Gold Fund (no load; 800-531-8000), up 8.9% to March 1. Some funds offer a hedge between gold and Treasury bonds as a package deal, though the manager can change the mix depending on his outlook on inflation. One such fund that has turned in a respectable record -- up 13.3% for the past year -- while exposing shareholders to less than half of the average equity fund's risk is Freedom Gold & Government (maximum 3% back-end load; 800-225-6258, 800-392-6037 in Massachusetts). Manager August F. Arace currently has 13% of the fund's assets in gold-related stocks, down from 30% in February. Arace usually holds at least half the portfolio in Treasury bonds.

HIGH-YIELD ENERGY STOCKS. With the shares of some blue-chip gas and oil companies recently yielding 5% to 9%, energy stocks could offer a relatively safe haven during a recession and also prosper if inflation accelerates. The rising gas and oil prices that would probably accompany higher inflation would boost these stocks' value, while their hefty yields would provide you with a safety net during a recession. For example, in 1979, when a 50% jump in oil prices fueled a 13.3% inflation rate, domestic oil stocks zoomed an astounding 56%. Even if inflation remains tame, swelling demand could pump up oil share prices. Similarly, rising demand for natural gas has finally eliminated the oversupply bubble that had depressed gas prices for much of the '80s. And the Bush Administration's push for more stringent air-quality standards could also boost future demand for clean-burning natural gas. To play this hedge, Richard C. Young, 49, editor of the newsletter Intelligence Report (320 Thames St., Newport, R.I. 02840; monthly, $99 a year), recommends companies ''that have cut their costs and therefore stand to benefit most if energy prices increase in the future.'' Young's oil company picks are $45 billion British Petroleum (recently traded on the New York Stock Exchange at $64.75), yielding 4.8%; $20 billion Occidental Petroleum (NYSE, $27.25), yielding a hefty 9.1%; and $31.5 billion Texaco (NYSE, $58.75), with a 5.1% yield. Companies he believes will benefit from rising natural gas prices include $939 million Atlanta Gas Light (NYSE, $29.25), 6.7% yield; $969 million Brooklyn Union Gas (NYSE, $30), 6.1%; and National Fuel Gas (NYSE, $25), with revenues of $836 million and a 5.4% yield.

ELECTRIC UTILITIES. The shares of electric companies tend to fare better than the overall stock market during recessions because the utilities' dividend yields, recently 6.6% on average, prop up these share prices. In addition, during inflationary periods, rising payouts can prevent utility stocks' values from eroding. To assure that the electric companies you choose do that, follow a few simple rules. First, resist the temptation to grab shares with the highest yields. ''Any time you find a utility with a yield above 9%, there's the % danger that the company may not be able to continue making its dividend payments,'' says John Slatter, a portfolio strategist who specializes in utilities at the regional brokerage Prescott Ball & Turben in Cleveland. Avoid any utilities that rely mostly on industrial customers, since their energy usage can decline substantially during a business downturn, thus depressing profits. And steer clear of companies in the midst of large construction projects that saddle them with debt -- especially if the new plants are nuclear and therefore prone to big cost overruns. Inflation and surging interest rates could squeeze such companies' profit margins, preventing dividend increases from keeping up with inflation. Among such stocks, Slatter currently recommends $2.1 billion Florida Progress (NYSE, $37.50), recently yielding 7%; $134 million Iowa Southern (traded over the counter, $32.25), 7.1% yield; and $1.5 billion Wisconsin Energy (NYSE, $28.50), 5.8%. If you prefer owning shares of funds to individual stocks, Don Phillips, editor of Mutual Fund Values, recommends Fidelity Select Utilities (2% initial load; 800-544-6666), up 33.7% for the three years to March 1, and Prudential-Bache Utility (4.5% initial load; 800-225-1852), up 39.7% for three years.

HIGH-QUALITY GROWTH STOCKS. Stephen Leeb, 43, editor of the investment newsletter Personal Finance (1101 King St., Alexandria, Va. 22314; 24 issues a year, $39), has identified four growth companies he believes are largely recession-resistant because of their proven ability to churn out earnings increases under almost any conditions. Says Leeb: ''Whether the economy fizzles or sizzles, these companies will continue to crank out profits.'' He also believes the firms dominate their industries so thoroughly that they are virtually assured of maintaining their profit margins -- and therefore their share values -- even during periods of high inflation. Leeb's picks, each of which has increased earnings without interruption every year for the past 15 years: $4.9 billion Capital Cities/ABC (NYSE, $510.50), a major broadcasting company that owns ABC and 80% of ESPN as well as 29 radio and TV stations; $9 billion Coca-Cola (NYSE, $74.75), the world's largest soft-drink maker; $6.1 billion Heinz (NYSE, $31.50), the international food-processing giant; and $4.5 billion Waste Management (NYSE, $34), a leading waste-disposal company. Currently, Leeb says, these stocks are relatively cheap because they are selling at price/earnings ratios roughly equal to their growth rates, compared with their more usual premiums of 50%. Even if a recession intervenes, he expects the stocks' prices to increase by 50% to 70% over the next two years.

INTERNATIONAL FUNDS. Although the economies of the world's major industrial countries influence one another -- witness how West Germany's rising rates dragged U.S. rates up -- they don't march in lockstep. As a result, when the U.S. economy slips into recession, you may be able to grab capital gains of 15% or more overseas in economies that are still chugging along. In fact, says Jon Woronoff, publisher of International Fund Monitor (P.O. Box 5754, Washington, D.C. 20016; monthly, $72 a year), a newsletter that tracks international funds: ''There's little question that Europe will experience far stronger growth in the near future than the U.S.'' While Woronoff expects that the opening of Eastern Europe, especially East Germany, will boost West Germany's economy, he cautions against investing there through closed-end funds, because these funds are currently selling at premiums of as much as 15% over their portfolio values. Instead, Woronoff favors the Austria Fund (NYSE, $14.50), which recently sold at a 9.5% discount. ''Austria will be able to capitalize on the increase in consumer demand from Eastern Europe,'' he says. Investors would be safer in an international fund that diversifies its holdings over many countries. Even the best foreign fund, though, can fall in price if the value of the dollar rises. (A higher dollar means that investments denominated in other currencies will be worth less to U.S. investors.) While currency fluctuations can also work in your favor, you should generally limit your investment in foreign stocks to 15% of your overall portfolio. Among foreign-stock funds, Woronoff's top picks are GT International (4.75% load; 800-824-1580), up 56.9% for the three years to March 1, and Scudder Global (no load; 800-225-8470), up 50.1% over the same period.

ASSET-ALLOCATION FUNDS. These mutual funds, which diversify broadly -- often holding several of the investments discussed above -- lower your risk to roughly half that of a typical portfolio of U.S. stocks. While the funds generally aim for moderate returns of around 10% a year, they vastly improve your odds of sailing through economic upheavals unscathed. One of the best-performing asset-allocation funds is Blanchard Strategic Growth ($125 initial fee; 800-922-7771), up 27.4% for the three years to March 1. Fund manager Andre Sharon, 54, who has run the fund since its inception in 1986, recently had 25% of the portfolio in U.S. stocks, 20% in foreign stocks, 15% in precious metals, 25% in U.S. bonds and 15% in Treasury bills and other cash equivalents. Though Sharon expects the U.S. economy to crawl along with 1.5% annual growth this year rather than slip into recession, the fund will hold up well even if the economy collapses. ''My cash position would protect me, and the value of my bonds would soar in a recession,'' he says. Similarly, his precious-metals holdings -- mostly North American and Australian mines as well as gold bullion -- would insulate the fund from an unexpected jump in inflation. Sharon emphasizes that he is more concerned with preserving capital than shooting for gargantuan gains. ''Our mission isn't to produce maximum profits under all conditions,'' he says. ''It's to avoid losing money in down markets.'' Still, in 1987, Sharon did a lot better than simply avoiding a loss: Blanchard Strategic Growth gained 16.4% -- more than three times the S&P 500's rise in that crash-interrupted year. Two other funds that have proved themselves adept at staving off losses are USAA Cornerstone (no load; 800-531-8000), up 23.2% for the three years to March 1, and SoGen International (3.75% load; 800-334-2143), up 29.5% for the past three years. Though SoGen is not classified as an asset-allocation fund, manager Jean-Marie Eveillard holds U.S. and foreign stocks, gold-related securities as well as domestic and foreign bonds. For the 10 years that ended March 1, the fund racked up a compound annual return of 19.1% vs. 16.1% for the S&P 500, without a loss in any year. ''Our approach doesn't appeal to everyone,'' admits Eveillard, ''but it's ideal for anyone who is going to own only one fund.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: Investment picks for these parlous economic times The U.S. economy is sending contradictory signals: corporate profits indicate that we are headed toward recession, but persistent inflation suggests that economic growth is becoming too robust. As a result, safety-conscious investors should consider investments, like the ones below, that will offer substantial shelter as part of a diversified portfolio. The first five are ranked according to the degree of protection they provide, from the most to the least. The sixth, asset-allocation funds, are best if you have $5,000 or less and want to make only one investment.