My "Find My Phone" location is grossly inaccurate

The Touch does not have GPS.

It uses WiFi 'geolocation' which looks for access points around it & then queries Apple's databases to see if they can calculate it's location. Obviously this is far less accurate than GPS.

There is really nothing you can do to improve it. This is a technical limitation. It should update the position when it connects to wifi & calls home to Apple, when it loses wifi signal it can no longer tell Apple where it is.

Each access point has it's own unique identifiers (it's SSID, MAC address etc). The DB that Apple (Google has it's own data) use for wifi geolocation may contain duplicates for mobile access points (cellular hotspots) which can confuse devices that only rely on wifi scans for location fixes. Some devices fail to be unique so the system has flaws (SSID's are common, MAC addresses can be cloned).

I think the best you can hope for is that Apple's DB gets updated & the issue resolves itself. I believe the option for 'submit diagnostics' in iOS will allow Apple to process the access points around you (ideally cross-referenced with GPS data on supported devices), eventually with enough data points the DB should change. It is unclear if Apple are only updating from this crowd sourced data or also using data from scans taken when Apple does it's mapping drive bye's. I suspect they also source from third party data too.

A third party GPS device can give you accurate data, but it is no use for finding a device via Find my iPhone if lost/ stolen.

Diagnostics & Usage are at the bottom of the Privacy settings if I recall correctly.

You may also need to enable the option to allow Apple access to location services in the Location Services settings > System services > Diagnostics & usage (to allow the GPS to be cross referenced). In theory that should allow them to crowd source the visible access point data. It's not clear to me how many data points they use, but if you have it active there is a chance it can get better over time.