Sanding by hand is quite possible and reasonable as long as it's paint, varnish or wood. Fully cured epoxy, that's another story. It's possible of course, but it will take a very long time. Fortunately, you're sanding varnish which is much softer than epoxy and much easier to sand.

Wet sanding is never ever done with an electric tool. Always by hand.

You wet sand because at 400 grit the varnish dust will clog the paper if you dry sand. Wet sanding lets you rinse the dust off the paper. Since the dust stays in the bucket of water, you don't need a dust mask. You also don't need ear protection and can sand in the same room as a sleeping person and probably not disturb them.

320 is right at the edge of the sandpaper clogging when dry sanding, which is why the can says you can dry sand it. But 400 leaves a smoother surface and 320 leaves dust.

When wet sanding, put the sandpaper onto a waterproof block (those hard rubber ones work best), dip it in a bucket of water and sand until the paper dries out. Dip into the bucket to rinse off the dust and do it again.

Remember, the varnish layer is very thin and you just want to knock off the high spots. Don't over sand.

Good luck,

Laszlo

   Thank you Laszlo!  This is a very helpful explanation.

Michael

   If using electric tools to wet sand, be sure and clench your teeth so you don't bite your tongue!  KIDDING.... Geesh 

Actually, VERY fine sanding and polishing is done routinely with electric tools fitted with ground fault interruption devices, and with pneumatic dual action (and other) devices.  You see this in the granite industry everywhere, safely and effectively.

Dry sanding to REALLY FINE levels is fine with open coat abrasives, which while not as common, do exist.  And even alright armed with the knowledge you simply have to pay very close attention to clearing your abrasives more carefully, AND that it's more critical that what you are sanding is fully cured.

Personally, I don't think hand sanding the epoxy is all that bad, and is necessary in all the corners and crevices.  Not necessary to go to the fineness required with the varnish since it is getting the varnish.  Disclaimer, I'm the one weirdo on the planet that likes sanding!!  
 

Mike

   I've done 4 boats varnished,never sanded between coats and been happy with the results

I'm with Greg on this. I let a coat of varnish get dry to the touch (usually just a few hours) and then immediately coat again without sanding. I think that as long as the varnish is still off-gassing, you can apply another coat and still get a good chemical bond. I wrote about all this on my blog when I completed the boat in February of 2016. I still haven't revarnished the exterior of the hull (6 years and counting), but I do plan to do it this spring. . . . Whether it needs it or not!

   An alternative to wet sanding is to give the surface a quick rubdown with a green Scotchbite pad. It does leave some dust that needs to be cleaned up.