2 Steam Accounts on 1 computer, installing games in 2 different locations...possible?

Very, very simple answer if you have the time to do this, and an NTFS file system*.

*Don't know what this is? Easy: Do you have Windows Vista or 7? If yes, then yes. If not, then "maybe", and you'll have to poke around to see. Disclaimer: This works on XP systems as well, but I haven't done it for a little while. Process for XP is different.

1. Keep Steam as it is. That's right, completely as it is.
2. Cut and paste your sister's games from your STEAMAPPS folder (in your X:\Program Files\Steam folder) to her portable drive.
3. Now open a command prompt. This can be found usually in the "Accessories" tab of your start menu, or some computers can just RUN a command called "cmd".

4. Enter the command "mklink", and press enter. It'll tell you that you can run a command like:

   mklink /d "x:\program files\steam\steamapps\sister's game 1\" "s:\sister's game 1\"
   

5. Work out the appropriate file placement, then if it's all lined up right and you've filled in all the info as it should be according to where your Steam is installed, and where your sister's games are, press enter.

6. Enjoy knowing that your sister's games are no longer taking room on your own hard drive.

Surprise Bonus Round!

Hey kids! Tired of your portable drive that you never unplug from having "performance issues"? This is because Windows tends to prevent disc write cache on any drive it's concerned may be unplugged without warning. By default, all USB drives count as this.

Want to milk better performance from it? Here's some easy steps*:

*Disclaimer: Though this process works on Windows Vista and Windows XP systems, it is slightly different to what is described below. Always use adult supervision when playing with your hardware settings!

1. Make sure your drive is connected to a high-speed USB port. It's not worth doing this on an old USB-1
2. Go to "My computer"
3. Right-click the drive you have plugged in. Click "Properties"
4. Go to "Hardware", and click on the drive you need to alter, and go to "Properties" again.
5. Under "Policies", turn to "Better Performance".

This now means that Windows will start using your USB drive as a high-performance drive, like the ones inside the case. This also means that "bad things" can happen if you pull the drive out, without using the built-in Windows "Safely Remove Hardware" button, found conveniently near your clock, in your System Tray.

Thanks for watching, kids! And remember:

Spyware no spying!

Steam puts all the content of games into the same folder under itself. I would highly recommend that you simply download all the games that you'll want to play on the computer to it, which will require the various accounts logging in to initiate downloading. If later you want to move some of the content to another computer, you can backup, move, and restore them.

The Steam KB recommends against putting Steam on an external hard-drive for performance reasons. That said, from their move procedure, it sounds like you may be able to have Steam installed in two separate locations and launch whichever you would like to run. This may wreak havoc with some things, but if you must have separate installs for some reason, it's worth trying.