Integrating Phonics and Sight Words

I started my twins on sight words and they easily got to 50+ sight words at age 2-something. The problem is when they forgot a word or ran into a new word they would randomly guess, so I felt that they were not really ‘reading’. I switched to phonics based on Sidney Ledson’s book (Teach Your Child to Read in 10 Minutes a Day), and now they point to each letter while saying the sound, and then blend to say the entire word. They’re currently 3 years old. The problem I have is that now when I try to get them to read, they sound out every letter even in the words they should have memorized by now. Any advice on combining the phonics and whole word approaches so they just say the words they know and sound out words they don’t know, without confusing them? I feel like we’re at a bit of a standstill right now with reading…

The only site words I used were those in pre-school preps meet the sight words. The rest I just have had my kids sound out. My elder son did a lot of slowly sounding out words he whould have already known and I wondered if her’d ever get there but he did all we did was keep practicing.