S&P 500 not a great place for short-term investments

And by short term investments, I mean 10 years or less.

Take it from me: I've learned a lesson the hard way. I've been investing monthly in the Vanguard S&P 500 Index fund (VFINX) for nine years, as a means to save up for a down payment on a home.

And now that the time has arrived for me to withdraw my funds, the market is in a horrible state. The S&P blew through the key support point of 1350 and finished out the week at 1317. It's dropping like a stone. Thankfully, I withdrew my funds on Tuesday before it fell below 1350, but I'm very disappointed that my assiduous saving hasn't had much payoff. (A good tip: apparently, you should never sell stocks on a Monday since statistics show that's the worst day of the week to sell).

As it turns out, VFINX has only managed a meager 3.5% return for the past 10 years. I suppose I should be grateful that it didn't have a negative return, but talk about a lousy place to stash cash for a major purchase. I could have done as well with a savings account at Emigrant Direct (which is a really good idea, btw, and they tend to have some of the highest rates going. Also check out ING).

I remember meeting with a financial planner in 1999, and he asked me to think about my long-term life goals. My most immediate goal, for the next 10 years, was to own a home. He suggested, since I was a new investor, that I go with regular monthly contributions to an index fund, such as the S&P 500. And so I did, now much to my disappointment. Of course, any savings at all is better than none, but there have to be better ways to weather the horrible economy that we've had for the past 10 years. Sadly, I don't know of anything that's much of a safe or reliable bet other than Treasury Bills and Internet savings accounts.

I'm still clinging to the belief that index funds are a good way to go over the long term, so if you have an S&P fund in your 401k portfolio, I'd say leave it there and ride out this economic downturn (which from what I'm reading and from a symposium I went to, will most likely be a U-shaped recovery that will take at least two more years).

In the meantime, what can you do? I highly recommend the simple exercise of thinking about your future and planning for possible expenses now. Do you want to own a home? Get married? Have a large wedding? Elope? Have children? Adopt children? Remain childless? Travel? What does your retirement life look like to you? Will you own a home in Florida? Will you rent? What is your life going to look like when you're 65? 70? 80+?

Even if you're single, you can still imagine the expenses attached to the life you want to lead, and start to save accordingly. We can't predict how our lives will turn out, but no matter what happens, wouldn't it be nice to have a little stash of cash saved up for that moment when we get to wherever it is we're going?

But for the short term, stay away from the S&P.