The poncho/tarp combo sounds like the answer to a dream -- you can replace your 2 pound rain shell, your seven-pound tent, and your pack cover with a 10-ounce piece of silnylon.

However, your concerns are valid. I have used a 5x8 tarp in bad weather, and it's quite small. If you have a fair amount of experience using a larger tarp (like an 8x10) in all kinds of weather, then you can downsize, but I wouldn't suggest it as your first tarp.

You might read this: http://thru-hiker.com/articles/ponchotarping.php

My own personal feeling is that a poncho/tarp combo works well in places where the rain comes in small bits -- say, out West in the summer. If you are hiking the Appalachian Trail in March, it's not quite as useful. (As a thought experiment, consider how you would set up camp in a downpour, after you have been walking all day in the rain wearing your poncho/tarp. Now that you have set up camp, and it's still raining cats and dogs, consider how you will gather water, cook dinner, and use the toilet, while your only rain gear is set up in tarp mode. Not saying it can't be done -- it can -- but you need to practice a lot ahead of time.)

Edit: my current shelter is a homemade 6x10-foot silnylon tarp. The extra couple of feet make a huge difference. I just carry separate rain gear appropriate to the season and location.