404 Traffic on Blog site

[Simon]

Yes, that's the code which WP will either insert into your htaccess file or ask you to insert if the file isn't writable by WP.

As far as creating your own 404 page versus sending 404s to your main page, you're probably fine sending surfers to your main page as long as it's a page they'll find interesting. Just remember that your 404 choice may be the only page some surfers will see. There's some good info on a few sites in the first search results below if you decide you want to use custom 404 pages with your blog.
http://www.google.com/search?q=404+page+for+blogs

HTH