Question on how gear works and what I should invest in.

So I have a general question about gear and upgrades. The biggest issue I'm running into now that is that I don't know what I should upgrade and shouldn't upgrade. Is the new shiny bow that I got from a dungeon that's marked level 0 better than the level 3 that I have?

In traditional MMOs if I'm level 15 and find a level 12 sword, I know it's under my level and I use it until I'm ready to move on and find a level appropriate weapon. How do I know that in TL? how do I know what's worth investing upgrades to? When it's a level 0 blue I assume it's stronger than a level 0 green when maxed, but are all 0 blues equal?