Personally, I find that if you are only making small amendments to pre-existing data without creating your own (i.e. adjusting a faction's stats vs creating a new one), then you will save yourself a lot of trouble by just directly modifying the original files. It is so much easier to backup your changes and the original file for when you want to revert or an update overwrites your changes.

Of course, I only say that because I have trouble getting mods to work sometimes if I use the mod folder. For example, I can create new factions (using only xml), planets, and star systems just fine; however, I can never get new static blueprints working unless I directly modify the original files. 

An append mod? I basically took the FactionDefs file from Crusade, modified the faction I wanted to change, deleted all the other factions, and saved it as a renamed file into the Mod folder. This use to work for me but doesn't seem to work anymore. 

I then went and modified the FactionsDef file directly with changes to one of the factions and it seemed to work just fine. I don't like modifying the main file though. I suppose I could make a backup as Nilfiry suggested. That would preserve the original file if I needed it again.