mregan,
I'll second Noah, don't add water, the muffler will take of itself(how many times can you say that when talking about a boat). I'm not sure why you close the engine intake valve in the first place, I've had my boat for 32 years and the only time I close that valve is to clean the filter or exercise the valve itself, the rest of the time it's open, one less thing to forget.
Concerning your motor, that Universal Diesel is one tough little beast. Over the years I've pegged the temp gauge a few times mainly due to sucking up something in the intake(kelp, plastic bag), if you don't catch it on the gauge you'll see a telltale cloud of steam off the transom telling you it's time to shut off the and fix the problem.
One time singling the boat home from a particularly rough crossing and towing two dinghies I finally made it to the marina approach (and calm water), I started the motor and almost immediately pegged the gauge(it's always something!)In that situation and for reasons of safety I decided not to shut off the motor. I motored in that condition for about 20 min to my slip. Afterwards I checked everything and ran the motor for about 30 min everything was fine, that was hundreds of hours ago, like I said they're tough little bastards.