To add to what Hardolph said, be sure that you select just a geographic coordinate system (lat and lon) and not a projection. If you select a projection, the "Add XY data" function will assume that the coordinates are the linear grid coordinates of the projection, not the angular lat and lon.
I use "Add XY data" all the time, but I reverted to a copy of 10.0 instead 10.1. Someone at ESRI thought that "Add XY data" was too useful, so they decided to screw it up. Now in 10.1, it reads numeric values as text, or text values as numeric (even within quotation marks), it adds fields (with indecipherable numeric values) that take an existing field name and add a "_D" suffix for no discernible reason, and it sometimes makes some numeric fields completely <null>.