I *generally* go with what looks good / playable to me, and I use my modern hardware / monitor (nothing bleeding edge but has done a good job of playing everything I've wanted as I want it to, so lucky that!).
I DO keep around an XP computer, but I haven't used it in ages. I think the last thing I ran on it was XCOM (installed off 3.5s!) on Dosbox a few years back. I've been lucky so far - everything I've wanted to run I've gotten up and going on my "gaming desktop."
Fallout 2 was a pretty good example for what I mean by "what looks good / playable" - I fired it up ~ a year ago? I played it in its original state (sans restoration mod) and found that if I kept it in its highest "native" resolution but forced the aspect ratio it filled out my screen and looked good. My monitor has a "magic button" that can force stuff also - I found that when I used that the figures and environments were much larger but at the same time not as crisp, a bit washed out and just not how I thought the game should look.
I also find that old shooters (Dark Forces 2 for example) can look very good with the resolution bumped up higher than any monitor in the day could do. But sometimes there are certain widescreen ratios that make the figures look more "blocky" or "fatter" than they should.
Generally when I fire up an older game, I'll spend a few moments just tweaking the visual settings until I get it where I want it to be. When I'm happy with that, I'll settle in and enjoy the ride ;)