Shield dimishes as it takes damage and over time. Some character have special shield breaker moves, which pierce through your sheild and damage you anyways, I think Marth has one.
As for shielding and getting damage as soon as you let it go, it's all about timing. With enough practice you can pull it off. I still have a hard time blocking right before opponent attack and then grabbing them :x but it's possible.
The game gets chaotic sometime but if you play enough you'll get used to it. FFA with items won't be like a regular 1 vs 1 in most fighting games, so it takes sometime to adjust.