There are no stupid questions in HT! This hobby of ours can be very complicated, confusing, and everybody has their system design preferences.
I agree with “jostenmeat” that the primary reason to connect multiple devices to an AVR is for convenience, and to grab the audio for processing. I seldom watch SD programming either so there is no reason for me, and many others, to up-convert anything.
When I do watch something that is not in HD, my TV works fine converting this type of video to the TV’s native resolution of 1080p. At least good enough for me. Others may prefer a good external scaler, but I do not have a need for one.
One reason that you may not want to run everything through your AVR is that you may not want to power-up your entire HT system just to watch the news or similar audio-poor programming. To explain, this is how my system is configured:
Onkyo 805 AVR (connected via HDMI) to HDMI input #1 on my TV. Used to pass video from devices connected to the 805 to the TV.
Blu-ray player connected via HDMI to the 805 so it can grab and process the HD audio. The video passes straight through to the TV untouched.
DirecTV HR20 DVR connected via HDMI to my TV’s second HDMI input with a separate optical link from the DVR to the 805. This provides two audio options when I watch DirecTV; 1) just standard audio from the TV speakers (news, regular programming, etc.), and 2) 5.1 audio from the 805 for programs that have good sound tracks.
I also have an Oppo DVD Player in the system that is connected to another HDMI input on the 805. Since the Oppo output connector is DVI (which blocks digital audio), I must use a coaxial connection to get its audio to the 805. Oppo products are well known for their up-converting capability so there is no reason for the 805 to touch its video either.
Lastly, I have an optical connection from my TV’s audio output to the 805 so I can watch/listen to OTA TV through the 805, or just listen to the TV though its speakers.
I image this all sounds complicated, but it gives me many options whenever I turn on the system. If I just ran everything through the AVR my listening options would be greatly reduced. (It really helps to have a good universal remote!) In addition, I have no need for the 805 video processor at all. Other than for the on-screen setup menu, I really would not need a video section at all.