Using stocks to earn a second income is a popular way to fund a more luxurious lifestyle in retirement. But it’s no secret that following the 4% withdrawal rule, investment portfolios need to be worth a considerable sum to provide a significant income stream, say £30,000.

Fortunately, building a big nest egg is relatively simple, thanks to compounding returns. And for those who are already lucky enough to have saved £50,000, the time frame isn’t as long as many might think.

Aiming for a second income of £30,000

At 4% per annum, an annual income stream of £30,000 would require the underlying investment portfolio to be worth £750,000. This is obviously not pocket money. But it’s also relatively easy to acquire with a combination of careful financial decision-making and patience.

Let’s start with one of the most popular investment methods: index funds. Since its creation, the FTSE100generated an average annualized return of approximately 8%. And while the FTSE250 has generally offered more than 11%, it has also been more volatile. Let’s say an investor wants to stick to a more conservative strategy.

With £50,000 to invest at an 8% return, how long would it take to reach £750,000? The answer is around 34 years old. Fortunately, a lot of time can be saved by simply replenishing the portfolio each month. And with just £500 a month more, the journey can be shortened by a decade. What if we wanted to speed things up even further?

Take more risks

If investors earned the FTSE 250’s historic average of 11%, the journey to earning a second income of £30,000 could be reduced to just 18 years. However, this is based on the assumption that the UK’s flagship indices will continue to generate their historical returns. And looking at more recent history, it’s just that was not the case.

In fact, both indexes over the past decade have barely exceeded the 6% average. So investors who rely on index funds could be waiting much longer than expected. And that’s why selection of individual titles could be the most effective strategy.

Although the British stock market has not been as explosive as that of the United States, the London Stock Exchange still offers its share of growth opportunities. A wonderful artist in my portfolio has been Alpha International Group (LSE:ALPH). The fintech FX risk management and alternative banking group has surged nearly 230% since my initial investment in 2020. That’s the equivalent of an annualized return of 34.8%!

These gains are due to increased demand for its services as volatility has flooded financial markets in the wake of the pandemic. However, much of this growth in the foreign exchange markets has begun to slow as economic conditions improve. Fortunately for Alpha, management used the Covid windfall to invest in its alternative banking platform which has carved out a lucrative niche to offset cyclical downturns.

Both cyclicality and volatility remain a notable risk for this business. Yet the cash-generating nature of its business gives management great flexibility, even in difficult times. And although it is now a member of the FTSE 250, that wasn’t the case a few years ago. In other words, index investors missed a great growth story.