I have been designing websites for a while now, but there is one thing that I have never been quite sure of when using PHP and HTML. Is it better to have the whole document
The syntax highlighting is an important benefit of the second method, as you said. But also, if you're following good practices where logic and presentation are separated, you will naturally find that your files that contain HTML are almost entirely HTML, which then, naturally, leads to your second method again. This is the standard for MVC frameworks and the like. You'll have a bunch of files that are all PHP, doing logic, and then when that's done they'll include a presentation file which is mostly HTML with a sprinkling of PHP.