I've put together a simple example below to help (maybe this is too simplistic, but it seems that real numbers were needed to explain better).
Let's say you invest $10,000 in 2012. You put your money in and you leave it there. You don't take it out or add any more.
Imagine you bought 1,000 shares each worth $10 (that's $10,000 = 1,000 shares x $10) of some index stock.
At the end of the year, the share price went down 37% (worst case, of course), so the share price is now $6.30. You still have 1,000 shares, but now your initial investment of $10,000 is down to $6,300. You don't do anything. You keep your money in here.
At the end of the next 5 years (of course there are ups and downs throughout the years), the share price has gone down 2.35% from your ORIGINAL amount (as JohnGalt explained below). So, now your shares are worth $9.77. You now have $9,770 of your original $10,000.
At the end of 25 years (worst case historically), your shares have gone up +7.94%. Now your shares are worth $10.79. Again, you still have 1,000 shares, so now your money is worth $10,790.
If you panic and start to take money out when the market is low and buy when it's high, then things don't look so good. The secret is just to buy and hold.
Does that make sense? (hopefully that's all correct - please correct me if I made a mistake!)
When holding for the long term, historically things look pretty good. One year fluctuations can be pretty big (and certainly day to day can be), but once you're looking at 5+ years, the numbers even out and the graph starts to look like a nice steady upward slope.