The homeschool market is filled with wonderful resources to help parents teach their children how to read. These resources approach reading instruction in various ways and appeal to various learning styles. Some encourage starting early and some encourage starting late. I don't think there is any "right" way to teach reading, as it is appropriate for the child.
For my own children, I decided to teach them as soon as they showed signs of readiness--around 3 or 4. I felt that teaching them how to read early was one of the best gifts that I could give them. I chose a combination of phonics and basal readers. We began with the old-fashioned Alice and Jerry books and added Hooked on Phonics when they were ready. This method worked very well for all of them. Other children might have done better with different materials, though, so below I have listed other programs that are either popular or that I admire.
Structured Programs
Classical Phonics, by Cheryl Lowe (Memoria Press)
Explode the Code, by Nancy Hall and Rena Price (EPS Literacy and Intervention)
First Start Reading, by Cheryl Lowe (Memoria Press)
Hooked on Phonics (Simon and Schuster)
The Ordinary Parent's Guide to Teaching Reading, by Jessie Wise and Sara Buffington (The Well-Trained Mind Press)
Phonics Museum (Veritas Press)
Phonics for Young Catholics (Seton Press)
Saxon Phonics -- home study kit (Saxon Publishers, Inc.)
Teach Your Child to Read in 100 Easy Lessons, by Siegfried Engelmann, Phyllis Haddox, and Elaine Bruner (Simon & Schuster)
Basal Readers
Alice and Jerry Basic Reading Program (Row, Peterson & Co.)
Bob Books series (Scholastic)
Christian Liberty Beginning Readers, by Florence M. Lindstrom (Christian Liberty Press)