Wet sanding is THE way to go with a polishing kit. As Jesper pointed out, dry sanding will often clog the papers (or pads) and scratch the finish.
When I'm sanding, I place the sanding sheets in a Tupperware bowl filled with warm water, to keep them wet. Also, be sure to rinse the sanded part under running water, carefully dry it off with a soft rag or towel and check your progress often. It gets tedious after a while - sand, rinse, dry, inspect - but the alternative of sanding through your top or color coats is much more annoying. Nothing can make your session go sour quicker than a beautifully polished paint job...with a ridge or corner burned through because you weren't paying attention.
HTH.
-YL