I would recommend not upgrading seemingly-useless items (or selling them) until you actually need the next item. You never know when something is going to come in handy and it's better to have a lot of everything on hand. You can convert items at any time anyway.
But I have to add that the whole system of item conversions and levels of items is fairly new and I assume most experienced players won't be able to give you advice on the lower-leveled storylets. (My main character has been around for a year, but I started an alt a few weeks ago and I was suprised to find that storylets previously costing, for example, 400 Whispered Secrets now cost 20 Appalling Secrets.)
Ooh, the clay affair story. The first time I played that I got the the last choice and just... chickened out. I didn't know what to do, so I ran away and worked on other storylets until I could finally make a decision that my conscience could be halfway comfortable with. The game is a fantastic storyteller.
The Starveling Cat! The Starveling Cat! Jumped down the well for a good long chat!