Windows 7 does a lot better job of managing things than XP did so I don't think you have any worries about "clogging up" your system.
When Microsoft finds out about a problem (especially security related problems) they will issue updates that will hopefully correct things. Sometimes they even issue updates for updates. So I believe you should install all critical and important updates issued by Microsoft. There may be optional updates offered as well, but you can review those and then decide if you want to install them. Personally, I also install recommended optional updates, too. (Microsoft has also improved identifying which updates you DON'T need and will not install them.)
You may want to reconsider keeping your updates on automatic. You will have no control over when the updates are installed or which ones are installed. A lot of people set updates to "Notify me but don't automatically download or install updates." This lets you review what Microsoft is offering. And then if there are a lot of updates like this past June (I think there were like 22 of them) you could install just a few at a time, make sure your computer is working properly, install the next few, etc. If there is a problem you'll know exactly which group of 3 or 4 or 5 updates is causing the problem.
And to help monitor updates for 3rd party programs like Java, Adobe Flash, etc you could also run a free program from Secunia. http://www.sevenforums.com/tutorials...inspector.html