I dunno... that sounds like the HARD way to do it...
I mean, there's more than one way to skin a cat, so if the technique works for you, go for it... but then there's little sense in making things harder than they need to be...
I've seen NO need to thin the Elmer's white glue. It's pretty thin already. You want a VERY THIN layer of glue anyway. If the glue layer is too thick, the paper will absorb too much water from the glue and get "mushy" and will get waves in it that will turn into wrinkles as you try to burnish the paper down tight to the fin surface. Extra water is the last thing you want on your balsa as well, ESPECIALLY if it's thin, (3/32 or less) because as it's absorbed into the fin it may well warp it. The key is a THIN, even coat of white glue on the paper, then wrapping it over the fin, and burnishing it down TIGHT and squeezing ALL the excess glue out from between the paper and wood. This actually makes the strongest joint, anyway, because excess glue actually weakens the joint between the paper and wood.
Doing the papering after the fins are on the rocket just seems more difficult as well, for no good reason that I can see... It's POSSIBLE, sure, but why do MORE WORK for the same result?? Papering first just makes it SO much easier to cut/trim/dress the edges of the fins... that's why I prefer the "White glue n printer paper" method to avery labels... a white glue/paper/wood joint is permanent... label adhesives, not so much... the fin can be sanded to the EXACT airfoil you want before papering, and the paper applied directly to the fin and rolled over the leading edge, which is subjected to the most force in flight trying to rip the paper away from the fin... no loose joints, CA hardened or otherwise, along the leading edge to turn loose from the slipstream ripping past in flight... and no "paper fuzzies" after sanding in the airfoil after the paper's applied, and having to clean that up.
Imperfections in the fins will show through, but only if they're bad enough. If you have dinged up balsa, switch to cardstock for papering the fins... it will cover the dings. Thicker white glue (undiluted with water) will help in this regard too, IMHO... I don't use thinned white glue, just 'straight' white glue, and I don't have grain or dings showing through... Besides, a couple good coats of primer and some 220 sanding followed by 440 should eliminate ANY show-thru's anyway...
Like I said, if it works for you, go for it, but I think it's taking something simple and making it complicated...
Later! OL JR