Financial planners agree on the biggest threat to a young investor: a 'false sense of confidence'

• Overconfidence is one of the most common biases among investors.
• When a new investor scores a big return, they might think it has more to do with their stock-picking ability or timing than forces outside their control.
• A financial planner said that to avoid succumbing to a "false sense of confidence,” investors should make a long-term plan and stick to it.

There's quite a bit of chance involved in stock-market investing.

As financial experts preach time and again, there's no way to predict returns with 100% certainty. No one — not even professional money managers — can time the market precisely. That means at least part of your performance as an investor is out of your hands.

But it's easy for a novice investor to think they can replicate returns, especially once they've made money using their stock-picking strategy of choice, said Eric Roberge, a certified financial planner and founder of Beyond Your Hammock.

"The worst thing that could happen to somebody in their first attempt to invest is choosing a stock that does well, because then they have this false sense of confidence that it's just as easy as picking the right stock — because I was smart enough to pick the right stock and that stock doubled, I can do it every time," Roberge said during Business Insider's Money Council roundtable in August.

When the stock market bottomed out in March because of concerns about the coronavirus pandemic, investors scooped up discounted stocks, often through investment apps that emphasize active management and offer commission-free trading, like Robinhood. Popular stocks on these platforms included tech companies like Amazon and Facebook, which have experienced outsize gains throughout the recovery, Roberge said.

Within five months, the S&P 500 had hit a record high, marking one of the fastest bear-market recoveries in history. Investors who achieved double-digits gains with relative ease might see it as a feather in their cap.

"With that false sense of confidence, the only thing that's going to happen to you is you're going to get upset at some point in the future when that sector, that stock is not doing as well anymore," Roberge said. "And you suffer a 30%-plus loss and then say, 'Oh, the stock market is not for me. It's just a gamble. I'm done.'"

Overconfidence is one of the most common financial biases

Joseph Edmondson, a certified financial planner with Equitable Advisors, agreed that there'd been a "false sense of confidence" afoot since the stock market skyrocketed from its lowest point during the pandemic.

According to the Corporate Finance Institute, one of the most common biases investors exhibit is overconfidence, often driven by an illusion of control. When investors believe they have control over a situation — which direction a stock will move, for example — they tend to overinflate their abilities and think situations are less risky than they are.

"It's a really challenging situation we face when we start to believe that our smarts, our active management is actually producing better-than-average results and all you have to do is continue to do those activities to make it work," Roberge said.

Edmondson said he tried to help every client understand that there will be ups and downs in the stock market and that neither should be the sole reason they sell their investments. The only sure way to success for an investor, he said, is developing a long-term plan that aligns with their personal risk tolerance and sticking to it.