to reduce the likelyhood of updates messing up my system, i usually do them all first before installing any other apps. while this isn't always possible since neq updates come out all the time, i usually rebuild my computer every other month. it just seems to run better/faster/cleanerright after a clean install.
since i imeadiatly do all of the updates, it has been very rare that i have noticed a problem with an update hosing up everything. although i have my hard drive partitioned with data on a seperate partition from apps and os. so if something did happen, i can wipe it clean and rebuild without fear of losing something.
in theory though, i would say that if you are on the internet a lot, especially if you are on a dedicated system and have a static ip address, doing the updates *should* keep your system from getting screwed up or hacked. although M$ has been known to have to patch the patched patch. In the end i think that you would be in a higher likelyhood of danger if you don't update your system. Now if you *NEVER* got on the internet, and i mean never, it appears that at least 50% of the patches won't apply to you. then again you could never know that if you didn't get on line to find out what they are for.
Regardless of how much a company tries to test an application before releaseing it, they can not fully understand what issues will come up until a few million people are using it. and if that is true for a single app, it is multiplied thousand fold for an opperating system.... especially one like xp where the browser, media player, email client, (and if you are running it) office suite are all so closely tied togeather. it seems like when one of those get a fatal problem it can cause havac to any or all of the other ones.