"Is it harmful to simply spread the frame by hand and guide the wheel into place? I have heard that if there is a 5mm difference then its okay, but what about using a 135mm hub with a 126mm spacing and not cold setting."

Assuming steel, it shouldn't be harmful, just look at the cold setting required to bend in the forks. What can be a problem is over stressing the joints, at the bridge etc... These areas can be supported to avoid problems.

Cold setting for real is a precise process that is used to re-establish the accuracy of frame components after the