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.