When you haven't a clue, ask her to show you. If my daughter hadn't pointed to her toes, she could have said "pailnolish" for hours and I wouldn't have known she meant "nail polish."
If you get it, don't get pedantic. Not great: "It's nail polish, not 'pail nolish,' sweetie." Totally cool: "What color nail polish should we use? The red nail polish?" Teach by repetition; correcting her could make her wary of practicing language.
If you still don't get it, change the subject. Don't make it seem like you're switching the topic because you've given up. Instead, initiate a new activity with enthusiasm ("Oh my goodness, I totally forgot we haven't sung any songs today!").
It takes two. Your baby isn't a parrot copying words -- she's conveying thoughts. Elaborate on what she says ("I love the red nail polish") and pay attention. The more she enjoys communicating with you, the more she'll try and the better she'll learn.