I agree with Tom Sanders that this is a subject of great interest to most of us involved with old bicycles. I have been teaching myself how to repair paint chips through trial and error and have been learning quite a bit and my results are improving all the time. I haven't read any articles or talked to any professionals on the subject so my comments are strictly coming from an amateur/novice.
First, I differentiate between paint "chips" and "rust coming through paint" and "long, wide worn sections of paint" etc. Each has to be treated differently.
In the case of true "chips" where a rock has hit the paint and chipped out a small section of it, I don't use sand paper and taper the edges and then mask it off and spray paint it. I take a small touch up (artists) brush and fill the chip hole similar to what a road repair crew would do with a pot hole, except that my job is measurably better that the pot hole fixers is. First, I take a zacto knife or something similar and pick around the edges of the hole to make sure that all the loose paint is removed and I'm working with solid edges. Next, I use the same knife to scrape away any rust or other stuff that may be living in the bottom of the chip hole. Many times, the undercoat or primer is still intact and only the top or color coat has been damaged, but if necessary, I scrape down to the bare metal and make it all shiny.
Now comes the part where I start filling up the hole with paint(s). If it's a fairly modern bike and I can still get touchup paint from the manufacturer I do. I recently bought a small can of blue touchup paint for my GIOS from the dealer. When I applied it to the frame, it might as well have been red for as close to a match as it was. The touch up paint was much darker in color than the paint on the frame was. It didn't look like the frame was faded at all, but maybe it was. So I went to the hobby shop and bought a tiny bottle of white enamel made by Testors for model cars and planes etc. I came home and began a long process of mixing the blue and white together to finally achieve a perfect match to the frame paint. I noticed that the frame had been undercoated/primered with a red oxide originally, so I got a small bottle of that also and applied it to the chip holes before I began putting the blue on. I do this primarily so the the color coat has an easier time matching the frame paint if it's sitting on top of the same color undercoat. This is more noticeable on lighter colored frames than the darker blues or blacks etc... Finally I begin applying coats of color to the chip holes and try to just fill up the holes and not let the paint spread out beyond the holes. This fills up the chip holes and doesn't create a high spot beyond the chip hole. Once the hole is filled, I can lightly polish the surface with some rubbing compound or a very light sanding, but I really try to stay away from sanding when I comes to filling chip holes. I use a high powered pair of magnifying goggles and the tiniest of brushes and lots of patience and time. If it doesn't look right as I'm doing it, I take a paper towell and wipe it out and try again because I don't want to leave a blob there and then try to sand it smooth later.
I usually can achieve good enough results with these techniques that clear coating is not necessary after I've rubbed it out with compound and waxed the area. But if the adjoining area is dull and the newly filled chip holes are brilliantly shiny and I can't get them to blend, or if the paint in the area is getting very thin, then I'm not opposed to putting a clear coat on it to give everything a nice even surface finish and to give the paint job a longer life overall.
Now, some of you will disagree with my techniques but let me point out that I don't consider myself a collector of bicycles. I love to repair, modify, restore, upgrade, improve, tweek etc on bicycles and I mostly love to ride each and every one of them. If I had a perfectly collectable bicycle, I'd probably make sure it got in the hands of a person who truly loves to collect them. Those people do not generally approve of clear coating anything, but preserving everything in it's original state. I do this to a certain point, but there comes a time when I say, "heck with it, let's strip it and give it a new paint job" etc... I love to look at other people's collections of bicycles, but when it comes to my own, I'd rather fix them up and go ride them and then pass them on to someone else and begin another project bicycle. I've always got at least six projects waiting to be built up.
Besides the hobby shops which are a great source for small amounts of paint that can be used for touch up work, I've found that the cosmetic section at the local drug store is another place where an almost endless array of colors can be found in the finger nail polish section. I recently found a polish that is a perfect...let me say again, perfect... match for the pearl white paint on my Bridgestone MB-1. I can't begin to tell you how happy I was to find that after trying a bunch of different white paints from various sources. I'm not beyond taking the fork or frame right into the drug store so I can match up the color and have never been asked to leave or anything. I don't have the nerve to wheel a complete bike into the store for that purpose, but carrying a fork or frame over my shoulder doesn't cause as much commotion as wheeling a whole bike in would.
I could go on, but this is a long posting as it is so I'll quit. I hope others will contribute their knowledge of touching up paint also.
Bruce Schrader 20+ miles today, even in the rain in San Francisco...
===== "Not all those that wander are lost." -J.R.R. Tolkien (1892-1973)