Sorry, I misread your message. (I should really get to bed as I read "firstly i was not told of it" as something like "firstly i was not told to use it"...)
In the online documentation at http://arduino.cc/en/Guide/Libraries
it tells you to use the libraries folder in your sketch folder. Yes it talks a lot about the new functionality in v1.0.5, but the manual installation section really hasn't changed. But, that said, I didn't get into this project until Arduino v1.0.3 so I don't know what it said prior to then.
I just looked in the IDE folder saw a "libraries" folder and came to the logical conclusion that I should put my custom libraries in there, how else should it be ? I don't understand why every tom dick and harry program thinks it has the right to mess with MY documents folder on MY machine.
But you see, the Arduino program wouldn't be messing with your documents folder on your machine when you
add custom or third-party libraries. You
are. (Well, actually, in your case, it probably does mess with your documents folder because you have it stuffed in your dropbox folder which is usually installed in your documents folder...) I guess the modern exception would be the new functionality to install new libraries. This feature will put new libraries in a folder named "libraries" that is inside what you
have told it is your sketch folder. See you still have limited control, you can tell it where your sketch folder is.
The idea is you let the installer put the programs and the default information in the (for example on windows) Program Files folders. That is the place for the installers to muck around in. The program runs and it stores user-specific preferences in the (again example is windows) "<user home>\AppData" folder. This is the place for programs to muck around in. You set up a working area in "<user home>\Documents", "<user home>\My Dropbox", or somewhere else that is easy for you to find/use in your <user home> path. This leaves the program folder available for installers to nuke and rebuild without touching settings. (Installers are notoriously stupid, so files they don't expect either break them or go to the bit-bucket along with everything else.) The preferences in "<user home>\AppData" is usually hidden so general users don't mess with it. It is a unique place for all the different users of the machine, but the same place for each running instance of the program by using environment variables to resolve where the <user home> is for the current user.
I also run KiCAD like this so that I keep custom component libraries between computers and don't have this problem because it keeps "itself to itself".
Similar with your KiCad environment. You should really have any component libraries and modules that you have created and/or edited outside the KiCad installation folders. Otherwise when you upgrade they may be overwritten. This is something that is highly stressed by the advanced people over on the KiCad forum... Actually, it is also suggested there that one should really only use the core libraries and modules as reference starting points for creating your own libraries and modules. (Kinda a given for me as I'm one of those oddballs who likes to have pin 1 indicated on all
components (pin numbers on schematics, square pad on boards), even non polarized components like resistors. It really helps (me) when tracing or documenting signal nets for modifications to easily find which side of a (for example) resistor one wants to cut a trace on a multi-layer board.)
My best advice to you for both programs is to extract all your custom stuff from the program install areas, and put all your custom stuff (custom/third-party Arduino libraries, KiCad libraries/modules as well as your actual projects for both programs) on dropbox so your
stuff can be shared across your 4 machines. (You may want to disconnect the machine you are doing this on from the internet until you finish. Re-connect and allow dropbox to synchronize the final result of all these changes instead of constantly synchronizing changes as you go.) Use the program installers on all 4 of your machines to put the actual program where the system knows about programs. Then configure all 4 machines to look in your dropbox folder for your working area. So you only have to download the installer once from the respective web-sites, put the installer for the latest version of the program in your dropbox folder. Then if/when you add a 5th machine, the installer for the version you are using on all the other machines is readily available. Especially valuable if you are keeping yourself back a version or two from the latest for that one feature that is essential to your work flow that got broken on the latest bug "fix".