Depends on what you are sanding. For polishing yes use finer and finer until it is very shiney.
Prepping for paint. No need to go any farther then 600. Anything more and you risk adhesion proplems.
And as for lots of water, you do need water but not enough to flood where you are working. I prefer to use a spray bottle with a touch of ivory soap. The soap helps to keep the paper unclogged.