(MONEY Magazine) – For many mutual fund investors, August's financial tempest was uncomfortably reminiscent of the even stormier month of October 1987. While this year's version lacked the climactic one-day panic of Black Monday, some categories of funds were clocked nearly as hard in the August sell-off as they were three years ago. In October 1987, for example, growth funds plunged 23% on average; this year they were down 17% from their high in mid-July to their late-August low. The comparable figures for small-company growth funds: a 27.5% loss in 1987 vs. a 20.5% drop this year. As you might expect, though, some funds withstood the deluge better than others. The four traditional defensive fund categories discussed below -- U.S. government bonds, asset-allocation, gold and total-return funds -- all outperformed the average stock fund, which lost 16%. Yet chasing such August champs now could make as little sense as buying an umbrella after you've been drenched. After all, a key lesson of the 1987 crash and its bull-market aftermath was that you should not let short-term setbacks distract you from your long-term goals. Still, if last summer's carnage convinced you that your risk tolerance isn't what it used to be, you might consider upping your exposure to Treasury bonds or trading in some of your more volatile equity funds for conservative total- return funds. Keep in mind, though, that no fund is completely bulletproof. So before you dial your fund's telephone switch number, examine the outlook for these safe havens, presented with the least risky categories first. -- U.S. Treasury bond funds. In the 1987 crash, U.S. government bond funds topped all categories with a 3.8% gain for the month. In August, however, government funds fell by 1.9% on inflation fears. Still, unless war breaks out, a weakening economy should allow rates on long-term Treasuries, lately around 9%, to drop as much as a percentage point by the end of 1991. That would translate to a total return of perhaps 20% -- and make this traditional shelter seem like a sure bet. But not so fast. The period between now and then could be quite rocky, with rates on long-term Treasuries rising as high as 9.5% and the price of the bonds dropping by 4.5% or so. Your safer choice: funds that specialize in less rate-sensitive intermediate-term bonds, such as Vanguard Bond Market, which holds five- to 10-year government issues along with some high-grade corporates. -- Asset-allocation funds. Funds that split your money among different asset categories -- including stocks, bonds, cash and often real estate and gold -- outperformed the average stock fund in the summer squall, losing 8% vs. the typical fund's 16%. But while asset allocators have the right idea -- diversification -- they tend to be strictly sour-market stars. Most advisers recommend creating your own well-balanced portfolio by spreading your money among several top-performing funds of different types. For funds worth considering, see The Money 20 on page 62. Such a multifund strategy can be impractical, however, if you have less than $5,000 or so to invest. In that case, you might consider one of the best asset allocators, the no-load USAA Cornerstone, up 98% in the five years to Sept. 1. -- Total-return funds. These funds will take their knocks in any further stock market sell-offs. But their high yields of 4.5% to 7% -- the product of portfolios tilted toward high-dividend stocks and convertible bonds -- should cushion the blow somewhat. From mid-July to late August, for example, the funds fell 11% compared with 17% for aggressive capital-appreciation funds. Over the past five years, moreover, several total-return funds have turned in performances worthy of much riskier funds. The August market crack thus provides a chance to pick up some top-shelf no-loads at bargain prices. Selected American Shares, for example, up 85% over five years, could be had for 7.6% less in early September than the month before; the estimable Lindner Dividend, up 66%, was going for 1.6% less. -- Gold funds. Financial sages are divided on the defensive virtues of gold funds. The yellow metal is a traditional refuge in times of political tension, and indeed the funds took off in the first weeks of the Persian Gulf crisis, rising 12%. By the end of the month, however, they had given back all their gains and then some, finishing down 1.5%. Still, an eruption of fighting in the Gulf -- which would likely crunch most other kinds of funds -- would probably stiffen demand for gold. As a result, you might choose to keep, say, 5% of your assets in a no-load metals fund such as Lexington Goldfund, up 6% in the past 12 months.

CHART: NOT AVAILABLE CREDIT: Source: Lipper Analytical Services CAPTION: WHERE TO KEEP DRY -- MORE OR LESS -- IN A MARKET STORM If you think the August sell-off was a hint of things to come, consider adding some defensive funds, such as the five below. But as the table shows, no fund holds up equally well in every bear market. Best advice: stay diversified and stick with a long-term strategy.