The question is, what are you trying to prevent/accomplish?
If you want to keep outside attackers out of your system, a firewall is a great tool. It can also protect you from 'spyware' or other inside threats provided it's setup correctly.
If you want to prevent advertisers from tracking your moves on the net, you have to have a dynamic IP address, and you have to employ some kind of software to keep your browser from revealing information about you through cookies or other means.
If you really want to make sure websites don't know who you are, or where you are located when you visit them, you'd have to go through some sort of proxy service like thecloak.com.
As for the separation of paranoia from reality, I think there's not much in the way of paranoia when it comes to advertisers tracking your habits. Most of it is true. They will go to great lengths to get information on everone -- not because they want information on you, but because information translates into $$$ for advertisers. If there's a legal (or even 'gray area') way for them to gain more information, they will use it. The only question really is, what are the negative effects of this tracking or the invasion of privacy on you -- that's where the paranoia comes in. I for one would gladly SELL my purchasing and surfing habits, but I refuse to give it away for free to advertising trackers like doubleclick.com so that they can turn around and profit from it.
The ones that bug me are the ones that gather information without your knowledge (spyware). I don't really care what information they gather, I don't like the fact that they do it without my knowledge or consent.