RTL: Phonemic awareness, phonics, phonetics

Chapter three is on code breaking - entering the text - One thing that stands out - any of the steps in isolation becomes less meaningful - integrated approach is best...

One of my assumptions about phonics became clear - but is it right?

I have always thought that phonics had value because I believed that our vocabularies inside our heads - the words we have heard over and over but may not have read - are much larger than our read vocabularies (as kids) and so - if kids could sound out a word - then they might be able to connect it to a word they know from having heard it... Is this in error?