I agree, it's really important to stay out of it as much as possible, and I also agree, at the ages of your kids, there's a power discrepancy. While it's easy to understand why you might err on the side of the youngest, a steady pattern of that could make your first-born feel unprotected. We also have a tendency to think that having them play "nicely" means they always have to share which is an impossible concept for toddlers and even for some preschoolers. Go instead for teaching turn-taking and other age-appropriate tools that will enable them to resolve conflict on their own. Even a 2-y-old can grasp this: "If you have a toy and you think your sister wants it, hold up your hand and say, 'Stop!' Tell her she can play when you finish." If the tables turn and the older anticipates the little one will bother her, tell her it's ok to have private play time in another room.
As much as possible, save intervention for when safety is an issue. On the other hand, try to anticipate that and intervene before safety becomes an issue. Here's how:
Establish ground rules for your family. Repeat them as needed: (1) "There is no hitting or grabbing in this house, and no teasing." (2) "In our family, when someone is upset, we use words to describe what we want and how we feel. We don't use words to hurt people." When you hear squabbling, first remind them: "Do you remember our family rules?"
Express confidence in their ability to resolve conflict themselves: "I hope you can solve this yourselves."
Offer some ideas: "Can you take turns? Do you want me to set the timer? Do you have another idea? Or you can say, 'Mom/dad, we need help."
If it's escalating and you step in, rather than take a side, tell them, "It sounds like you two need a break. Let's put that toy away [where neither can reach it)] Amy, you play over here, and Briana, you play here." Set a timer for 3 or 4 minutes. When it goes off, ask them, "Do you want to try to play together again? Or do you want to wait?"
Adele Faber, co-author of the classic "How to talk so children will listen and listen so children will talk," and "Siblings without rivalry," once offered me this example of how to help young kids manage their conflict which I'm reprinting here.
Restate the problem. Ask each child to describe the problem, then restate it yourself: "You both want to sit in the same chair, and you each were mean to the other. Is that right?"
Acknowledge feelings. "No wonder you're both so upset, this is a hard problem! Two brothers want to sit in the same chair at the same time."
State the rule. "You know the rule: We don't say anything mean."
Offer options. "Let's figure out what you can do to solve this problem. Should you set a timer, so you each have a turn? Can two brothers sit in the chair together?"
Express confidence in them: "Jeff, I think you are a fair person. Matt, you're also a reasonable person."
Walk away: "I trust you two to work this out in a way that's fair to you, Jeff, and to you, Matt." Don't go too far away in case things accelerate, but resist going back in unless it does.
Read my full column for more ideas.